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LIBRARY 


University  of  California. 

Gl  FT    OF 


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THE  CURRENCY 


RBPORT  BY  TUS 

SPECIAL  COMMITTEE 

OP  TBB 

CHAMBER  OF  COMMERCE 

OP  THS 

STATE  OF  NEW  YORK 


ADOPTHD  BY  THE 
CHAMBER,  KOV.  1,  190^: 


SUBMITTED  TO  THE  CHAMBER 
OCTOBER  4,  1906 


THE  CURRENCY 


REPORT  BY  THE 

SPECIAL  COMMITTEE 

OF  THE 

CHAMBER  OF  COMMERCE 

OF  THE 

STATE  OF  l^EW  YORK 


°'^™^.  Nov"  rx.- 


SUBMITTED  TO  THE  CHAMBER 
OCTOBER  4,   1906 


^t 


^^^ 


SPECIAL   CURRENCY    COMMITTEE  OF  THE 

CHAMBER  OF  COMMERCE 

OF    THE    STATE    OF   NEW   YORK 


JOHN  CLAFLIN,   Chairman 

FRANK  A.  VANDERLIP,  Vice-Chairman 

ISIDOR   STRAUS 

DUMONT   CLARKE 

CHARLES   A.    CONANT 

JOSEPH    FRENCH   JOHNSON,    Secretary 


I    UNiVEftSlTY    \ 

Mr.  Morris  K.  Jesup, 

President  of  the  Chamber  of  Commerce  of  the  State   of 
New  York. 

Sir : 

The  Special  Currency  Committee  appointed  by  you  in  March, 
1906,  to  inquire  into  the  condition  of  the  currency  and  to  suggest 
desirable  changes,  beg  to  submit  the  following  report. 

The  Committee  held  their  first  meeting  on  March  14,  1906, 
and  met  at  frequent  intervals  from  that  time  up  to  the  date  of 
this  report.  Suggestions  were  sought  by  circular  letter  from 
members  of  the  Clearing  House  Committees  of  principal  cities, 
consultations  were  held  with  leading  bankers  in  the  United  States 
and  the  experience  of  the  heads  of  the  chief  European  banks  of 
issue  was  sought  by  letter  and  by  personal  visits  of  one  of  the 
members  of  the  Committee,  and  is  embodied  in  letters  printed  as 
an  appendix  to  this  report. 

The  gold  supply  of  the  United  States  on  July  i,  1906, 
amounted  to  $1,475,841,821.  In  addition  to  this  gold,  the 
country  contained  on  that  date  $1,594,048,919  of  other  cur- 
rency, as  follows:  United  States  notes  $346,681,016,  Treas- 
ury notes  of  1890,  $7,386,000,  silver  dollars  (or  certificates) 
$560,864,855,  National  bank  notes  $561, 1 12,360,  subsidiary  silver 
$117,998,588.  The  total  stock  of  currency  was  $3,069,884,640, 
of  which  $2,744,483,830  was  in  circulation,  the  remainder, 
$325,400,810,  being  held  in  the  United  States  Treasury.  The 
representative  money  is  kept  at  par  with  gold  either  through 
direct  redemption  or  through  limitation  of  the  supply.  In  view 
of  the  measures  taken  to  maintain  its  equality  with  gold  by  the 
Act  of  March  14,  1900,  we  do  not  think  it  necessary  to  recom- 
mend any  further  steps  in  this  direction  at  the  present  time. 

ONE   IMPORTANT  Di^FKCT. 

We  find,  however,  that  the  monetary  system  is  defective  in  one 
most  important  respect,  namely,  flexibility,  and  that  in  conse- 
quence the  country's  business  interests  are  at  times  seriously 
hampered.  This  defect  is  due  to  restrictions  which  are  unneces- 
sarily placed  by  law  upon  the  use  of  bank  credit.     Nearly  fifty 

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1G2898 


per  cent,  of  the  people  of  the  United  States  are  engaged  in 
agricultural  pursuits,  and  the  fruits  of  their  toil  are  harvested  in 
the  autumn.  These  harv^ests  and  the  marketing  of  the  crops 
bring  to  bear  upon  the  banks  a  two-fold  strain/  one  for  capital, 
the  other  for  currency.  The  demand  for  capital  comes  from  the 
buyers  and  shippers  of  agricultural  products  and  is  in  the  main 
satisfied  by  an  expansion  of  bank  loans  and  deposits,  most  of  the 
payments  being  made  by  check  and  draft.  The  demand  for  cur- 
rency comes  principally  from  the  farmers  and  planters,  who  must 
pay  their  help  in  cash.  In  the  satisfaction  of  this  demand  the 
banks  are  unable  to  make  use  of  their  credit,  but  are  obliged  to 
take  lawful  money  from  their  reserves  and  send  it  into  the  harvest 
fields.  As  a  result,  the  money  reserves  of  banks  are  reduced  at 
the  very  time  when  the  demand  for  loans  is  increasing,  and  in 
consequence  the  rate  of  interest  is  advanced. 

THE   HARVEST  DEMAND   FOR   CURRENCY. 

This  harvest  demand  for  currency  and  capital  is  first 
felt  in  July  by  the  reserve  cities  of  the  southwest,  as  the 
winter  wheat  of  that  region  ripens.  At  that  time  the  country 
banks  of  Oklahoma  and  Kansas  and  the  banks  of  the  reserve 
cities  in  that  region,  especially  those  of  Kansas  City  and  St. 
lyouis,  are  pressed  for  loans  by  the  buyers  of  grain,  and 
for  currency  in  small  denominations  for  the  payment  of 
harvest  hands.  Their  surplus  stock  of  currency  being  soon 
exhausted,  these  banks  draw  upon  their  balances  in  Chicago, 
New  York,  and  other  eastern  cities.  Then,  as  the  season  pro- 
gresses and  crops  in  various  sections  of  the  country  are  har- 
vested, a  flow  of  currency  from  the  east  to  the  south,  to  the  west 
and  to  the  northwest  sets  in  and  does  not  cease  until  the  cotton, 
corn  and  wheat  of  the  country  are  all  marketed  and  the  farmers* 
work  for  the  season  is  over. 

No  statistics  are  available  showing  the  total  of  this  period- 
ical movement  of  currency.  The  increase  in  the  demand  for 
loans  on  account  of  the  crop  movement  cannot  even  be  conject- 
ured, but  the  shipments  of  currency  from  the  banks  of  the  cities 
into  agricultural  regions  might  easily  reach  $150,000,000.  The 
amount  passing  through  six  Chicago  banks  last  year  reached 
$92,000,000.     This  currency  goes  in  the  form  of  gold  certificates, 

4 


silver  certificates,  United  States  notes  and  National  bank  notes. 
All  these  except  the  bank  notes,  which  form  only  a  small 
proportion  of  the  whole,  are  "lawful  money,"  and  their  ship- 
ment, therefore,  causes  a  corresponding  reduction  of  bank  re- 
serves. 

CONTRACTION   IN   THB   FALl.. 

Since  experience  has  proved  that  a  dollar  in  a  bank  reserve 
is  adequate  protection  for  an  indebtedness  of  four  dollars  due 
to  bank  depositors,  it  is  evident  that  the  withdrawal  of 
$100,000,000  from  the  banking  reserves  of  the  country  might 
lead  to  a  contraction  of  bank  loans  and  deposits  by  an  amount 
four  times  that  sum,  namely,  $400,000,000,  such  contraction 
being  the  result  of  the  efforts  of  banks  to  increase  their  reserves 
by  calling  loans.  Thus  at  a  time  when  the  legitimate  demand 
for  loans  is  increasing  in  order  that  the  great  agricultural  yield 
of  this  country  may  be  brought  to  market,  the  lending  power  of 
our  banks  is  actually  curtailed  by  several  hundred  million  dol- 
lars. As  a  result,  borrowers  of  all  classes  are  forced  to  pay  un- 
usually high  rates  of  interest,  many  business  men  are  unable  to 
secure  customary  accommodations  from  banks,  and  the  prices  of 
many  articles  of  commerce  suffer,  the  buying  demand  having 
weakened. 

INFI^ATION   IN  THE  SPRING. 

Unfortunately  these  evils  are  not  the  only  ones  that  result 
from  the  defective  character  of  our  monetary  system.  During 
the  winter  and  spring  there  is  a  return  flow  of  lawful  money  from 
the  country  to  the  cities,  and  the  surplus  reserves  of  the  banks  in 
financial  centers  are  increased  as  rapidly  as  they  had  been  dimin- 
ished in  the  fall.  As  the  city  banks  pay  interest  on  this  money, 
they  cannot  suffer  it  to  lie  idle  in  their  vaults;  hence  the  rate  of 
interest  is  lowered,  and  speculation  is  thus  unduly  encouraged. 
Bankers  are  aware  that  the  country  will  again  call  for  this  money 
in  the  fall  and  are  careful  not  to  lock  it  up  in  long-time  paper. 
Most  of  it,  therefore,  is  put  out  on  call,  and  so  finds  its  way  into 
the  hands  of  men  whose  interests  are  largely  speculative.  Here 
we  have  the  secret  of  our  so-called  "spring  boom"  in  speculation. 
It  is  the  product  of  inflation,  just  as  our  autumnal  stringency  is 

5 


the  product  of  contraction.  So  long  as  reserve  money  to  the 
extent  of  $150,000,000  is  being  shipped  about  the  country,  now 
lying  for  a  few  months  in  the  vaults  of  banks,  now  circulating 
among  the  farmers  and  the  planters  of  the  west  and  the  south, 
these  alternate  periods  of  excessive  speculation  and  depression 
are  inevitable. 

DUE   TO   RESTRICTION   OF   BANK   CREDITS. 

This  condition  of  affairs  is  the  product  of  legislation  which  the 
country  has  outgrown.  By  the  National  Bank  Act  our  banks, 
while  permitted  to  utilize  their  credit  in  the  form  of  deposit 
accounts,  thus  rendering  available  many  hundred  millions  of 
capital,  are  restrained  from  any  natural  or  free  use  of  that  credit 
as  a  common  medium   of  exchange. 

Between  a  bank  note  and  a  bank  check  there  is  no  essential 
difference.  The  depositor,  to  be  sure,  is  a  voluntary  creditor 
of  a  bank,  and  the  checks  written  by  him  do  not  circulate  widely 
without  endorsement,  whereas  a  bank  note  is  an  acceptable  sub- 
stitute for  money  among  people  who  have  little  or  no  knowledge 
of  the  issuing  bank.  Nevertheless  both  the  check  and  the  note 
are  representatives  of  money  and  both  must  be  redeemed  on  pre- 
sentation. They  have,  however,  different  fields  of  usefulness. 
The  home  of  the  bank  check  is  the  town  and  the  cit}^  where 
people  keep  their  funds  in  banks.  The  bank  note,  on  the  other 
hand,  properly  belongs  in  the  country,  among  people  who  have 
no  bank  accounts,  with  whom  it  is  quite  as  effective  as  money 
itself.  If  our  banks  were  permitted  during  the  crop-moving 
season  to  increase  their  issues  of  bank  notes  by  from  $100,000,000 
to  $200,000,000,  these  notes  would  go  into  the  harvest  fields  and 
do  the  work  which  now  absorbs  legal  tender  money.  Since  the 
banks  under  such  circumstances  would  not  be  obliged  to  pay  out 
lawful  money  from  their  reserves,  they  would  be  under  no  com- 
pulsion to  contract  their  loans  as  at  present. 

NATIONAL  BANK  NOTES  NOT  AVAII,ABI.E. 

Unfortunately,  the  conditions  governing  the  issue  of 
National  bank  notes  are  such  as  to  prevent  their  being  availed  of 
to  meet  the  harvest  demand  for  currency.  National  bank  notes 
can  be  issued  only   by  banks  which  have  previously  deposited 

6 


with  the  Treasurer  of  the  United  States  government  bonds  of 
a  par  value  equal  to  the  face  of  the  notes  to  be  issued.  A  bank, 
therefore,  before  increasing  its  circulation  is  obliged  to  buy 
government  bonds. 

The  experience  of  forty  years  since  the  enactment  of  the 
National  Bank  Act  has  proved  that  a  bank  note  based  upon 
bonds  cannot  be  relied  upon  to  take  care  of  temporary  fluctua- 
tions in  the  country's  need  for  currency.  In  no  single  year  since 
the  passage  of  the  National  Bank  Act  has  the  volume  of  bank 
notes  shown  more  tendency  to  increase  in  the  fall  than  in  the 
spring,  nor  has  their  volume  ever  shown  any  tendency  to  de- 
crease when  the  currency  was  redundant.  Their  issue  and  retire- 
ment appear  to  have  been  regulated  entirely  by  investment  con- 
ditions in  the  bond  market  absolutely  unrelated  to  the  country's 
need  for  currency. 

BANK    NOTES    ARK   NOT   MONKY. 

It  is  proper  to  call  attention  to  an  important  distinction 
between  a  bank  note  and  other  kinds  of  currency.  The  silver 
dollar,  the  silver  certificate,  the  Treasury  note  and  the  United 
States  note  are  given  by  law  a  function  which  the  bank  note 
does  not  and  ought  not  to  possess,  for  they  are  rated  as  lawful 
money,  so  that  in  the  reserves  of  banks  they  are  counted  as  the 
equal  of  gold  itself.  Any  increase  in  the  supply  of  such  money, 
therefore,  would  evidently  lead  to  an  increase  of  the  lending 
power  of  banks,  for  part  of  the  new  currency  would  certainly 
find  its  way  into  banking  reserves.  The  bank  note,  however, 
except  in  the  vaults  of  state  and  private  banking  institutions, 
cannot  be  counted  as  money.  Ikying  in  the  vaults  of  a 
National  bank  it  is  like  a  promissory  note  still  in  the  hands  of 
the  signer — a  piece  of  dormant  or  slumbering  credit,  not  consti- 
tuting a  liability  of  the  bank,  and  without  influence  upon  the  - 
prices  of  either  commodities  or  securities.  Bank  notes  are  not 
money  and  should  not  be  given  by  law  any  of  the  prerogatives 
of  money.  They  are  intended  to  serve  merely  as  a  medium  of 
exchange,  and  the  conditions  governing  their  issue,  like  those 
now  governing  the  issue  of  checks,  should  be  such  as  to  call 
them  into  existence  only   when  they  are  needed  and  to  compel 

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their  retirement  or  redemption  when  their  work  is  done. 

Since  the  National  bank  note  is  secured  by  a  deposit  of 
government  bonds,  it  seems  as  good  ''money"  as  the  greenback. 
Why,  then,  it  is  often  asked,  should  it  not  be  treated  as  money 
and  counted  as  such  in  bank  reserves  ?  Experience  has  proved 
that  such  a  course  would  be  most  dangerous.  A  bank  note, 
no  matter  what  the  collateral  behind  it,  is  a  bank  liability,  like 
a  certified  check,  and  may  at  any  time  necessitate  the  payment 
of  actual  money.  To  make  it  legal  tender  or  lawful  money 
would  be  equivalent  to  permitting  banks  to  count  in  their  re- 
serves the  sums  which  are  due  them  from  other  banks.  If  such 
a  policy  were  sanctioned  by  law,  there  would  be  practically  no 
limit  to  the  expansion  of  bank  deposits  and  loans  that  would  be 
possible  without  any  increase  in  reserves  of  actual  money.  If  Bank 
A  were  permitted  to  count  the  notes  of  Bank  B  as  lawful  money, 
and  Bank  B  could  do  the  same  with  the  notes  of  Bank  A,  the 
effect  would  be  the  same  as  if  banks  were  suffered  to  count  their 
own  notes  in  their  reserves.  This  would  lead  to  the  conversion 
of  the  bonded  debt  of  this  country  into  demand  notes  like  the 
greenbacks  and  would  not  be  less  dangerous  because  the  conver- 
sion would  be  indirect  and  disguised,  for  under  such  conditions 
the  increase  in  the  volume  of  bank  notes  would  tend  to  cause  an 
expulsion  of  gold,  and  so  endanger  the  maintenance  of  the  gold 
standard,  quite  as  effectively  as  would  an  increase  in  the  volume 
of  greenbacks. 

UNITEJD  STATES  BONDS  AN  IMPORTANT  FACTOR. 

The  present  currency  problem,  in  our  opinion,  might  be 
satisfactorily  solved  in  several  different  ways,  yet  there  is  one  im- 
portant consideration  which  should  not  be  left  out  of  account. 
The  National  banks  are  owners  of  United  States  bonds  of 
a  face  value  of  over  $600,000,000,  and  the  market  valuation  of 
these  bonds  is  largely  based  on  the  fact  that  they  are  required  as 
security  for  bank  notes.  If  any  other  security  were  substituted. 
United  States  bonds  would  inevitably  decline  in  price.  This 
situation  is  one  of  the  first  and  practically  one  of  the  important 
things  that  must  be  considered.  Those  who  plan  changes 
in  our  currency  are  not   free  to  outline  de  novo  an  ideal  sys- 

8 


tern,  but  must  alwaj^s  keep  before  them  the  fact  that  the 
Government  bond  issues,  sustained  as  they  are  now  by  artificial 
conditions,  cannot  prudently  be  left  to  seek  a  normal  level.  Such 
a  course  would  be  unwise  in  itself  and  would  with  certainty 
antagonize  almost  every  person  interested  in  a  National  bank. 

A   CENTRAI,  BANK   OF   ISSU:^. 

In  our  opinion,  the  best  method  of  providing  an  elastic  credit 
currency,  the  volume  of  which  could  never  be  excessive,  would  be 
the  creation  of  a  central  bank  of  issue  under  the  control  of  the 
Government.  This  central  bank  should  have  branches  in  the  lead- 
ing cities,  and  should  have  dealings  only  with  banks.  Although 
its  capital  stock  might  be  privately  owned  or  distributed  among  the 
banking  institutions  of  the  country,  it  should  be  under  the  direct 
control  of  a  board  of  governors  appointed,  at  least  in  part,  by  the 
President  of  the  United  States,  for  it  should  perform  some  of 
the  functions  now  imposed  upon  the  United  States  Treasury,  and 
should  at  the  same  time  be  managed  not  exclusively  for  private 
gain  but  for  the  public  good  as  well.  This  bank  should  have  a 
large  capital,  not  less  than  $50,000,000.  It  should  carry  a  large 
reserve  of  gold  and  should  act  as  custodian  of  the  metallic 
reserves  of  the  Government  and  as  its  agent  in  redeeming  all 
forms  of  credit  money.  It  should  also  be  receiving  and  disburs- 
ing agent  for  the  government,  doing  at  its  branches  the  work  now 
done  at  the  sub- treasuries.  It  should  hold  the  five  per  cent, 
redemption  fund  now  deposited  in  the  Treasury  by  the  National 
banks  for  the  current  redemption  of  their  bond-secured  notes, 
and  should  redeem  National  bank  notes  both  at  its  central  office 
and  at  all  of  its  branches. 

ADVANTAGKS   OF   A   CBNTRAI.   BANK. 

The  operations  of  central  banks  in  Europe,  especially  in 
France,  Germany,  Austria-Hungary  and  the  Netherlands,  make 
it  impossible  to  doubt  that  the  existence  of  such  a  bank  in  this 
country  would  be  of  incalculable  benefit  to  our  financial  and 
business  interests.  Such  a  bank  in  times  of  stress  or  emergency 
would  be  able  by  regulation  of  its  note  issues  to  prevent  those 
sudden  and  great  fluctuations  in  rates  of  interest  which  have 

9 


in  the  past  proved  so  disastrous.  Furthermore,  it  would  have 
the  power  to  curb  dangerous  tendencies  to  speculation  and 
undue  expansion,  for  by  the  control  of  its  rate  of  interest  and 
of  its  issues  of  notes  it  would  be  able  to  exert  great  influence 
upon  the  money  market  and  upon  public  opinion.  Such  power 
is  not  now  possessed  by  any  institution  in  the  United  States. 
Under  our  present  system  of  independent  banks,  there  is  no 
centralization  of  financial  responsibility,  so  that  in  times  of 
dangerous  over-expansion  no  united  effort  can  be  made  to 
impose  a  check  which  will  prevent  reaction  and  depression. 
This  is  what  a  large  central  bank  would  be  in  a  position  to  do 
most  effectively.  A  central  note  issuing  bank  would  supply  an 
elastic  currency  varying  automatically  with  the  needs  of  the 
country.  This  currency  could  never  be  in  excess,  for  notes  not 
needed  by  the  country  w^ould  be  presented  for  deposit  or 
redemption. 

resume:  of  advantages. 

The  advantages  of  such  a  central  bank,  in  brief,  would  be 
as  follows  : 

(i)  It  would  supply  the  country  with  an  elastic  currency 
responsive  to  the  varying  needs  of  business. 

(2)  It  would  tend  to  steady  the  rate  of  interest  at  all  sea- 
sons, and  to  give  relief  in  periods  of  industrial  and  financial  stress, 
for  its  large  resources  would  enable  it  to  meet  extraordinary  and 
sudden  demands  for  both  capital  and  currency. 

(3)  It  would  relieve  the  Federal  Treasury  of  the  duties  now 
imposed  upon  the  Division  of  Issue  and  Redemption,  and,  on 
account  of  its  intimate  relations  with  the  money  market,  would  be 
in  a  position,  as  the  Treasury  is  not,  to  protect  itself  against  a 
prolonged  drain  upon  its  reserves. 

(4)  It  would  do  away  with  the  cumbersome  sub-treasury 
system  and  keep  the  money  of  the  country  always  at  the  dis- 
posal of  trade  and  commerce,  so  that  the  government's  collec- 
tions and  disbursements  would  cause  neither  contraction  nor 
inflation. 

10 


In  this  connection  we  beg  you  to  give  careful  attention  to 
the  able  letters  from  distinguished  European  financiers  which  are 
submitted  v^^ith  this  report.  These  letters  clearly  set  forth  the 
beneficial  operations  of  the  great  central  banking  institutions  of 
German}^,  France,  Austria-Hungary  and  the  Netherlands.  The 
data  they  supply  in  the  case  of  Germany  and  Austria-Hungary 
show  the  operation  of  a  credit-currency  issued  under  a  special 
tax  to  have  been  strikingly  beneficial  in  maintaining  moderate 
rates  of  interest  during  the  periods  of  moving  the  crops  and 
making  the  quarterly  settlements. 

MODIFICATION  OF  THE  EXISTING  SYSTEM. 

If  for  any  reason,  political  or  financial,  the  establishment 
of  a  central  bank  of  issue  is  not  advisable,  your  Committee  would 
recommend  the  adoption  of  some  plan  whereby  additional  powers 
of  note-issue  shall  be  extended  to  National  banks.  As  already 
has  been  said,  the  greatest  defect  of  the  present  bank  note  sys- 
tem is  the  fact  that  its  volume  bears  no  relation  to  the  demand 
for  currency.  No  permanent  increase  of  the  stock  of  our  credit 
money  is  called  for.  Indeed,  any  such  increase  would  be 
attended  with  risk,  for  it  might  cause  an  expulsion  of  gold  in 
such  large  quantities  as  to  provoke  lack  of  confidence  in  the  main- 
tenance of  the  gold  standard.  Your  Committee  would  emphasize 
this  point.  Inflation  is  even  more  dangerous  than  contraction, 
for  its  perils,  being  usually  masked  by  a  fictitious  prosperity, 
are  often  unnoted  and  ignored  until  great  harm  has  been 
done.  Certainly  no  measure  should  be  taken  to  encour- 
age it.  What  is  needed  is  not  a  permanent  increase  of 
the  currency,  but  the  addition  of  a  variable  element  issued  and 
redeemed  under  such  conditions  that  its  supply  shall  exactly 
correspond  with  changes  in  the  demand   for  currency. 

If  this  variable  element  is  to  be  issued  by  existing  National 
banks,  it  is  clear  that  the  motive  for  its  issue  must  be  indepen- 
dent of  those  investment  considerations  regarding  bonds  which 
now  render  the  National  bank  circulation  unresponsive  to  the 
fluctuating  demand  for  currency.  The  quantity  of  such  notes 
which  a  bank  may  issue  should  not  bear  an  unvarying  ratio  to 
the  amount  of  its  bond-secured  circulation.     It  is  proper,  in  our 

11 


opinion,  to  require  a  National  bank  to  invest  a  certain  proportion 
of  its  capital  in  government  bonds  as  a  prerequisite  to  the  right  to 
issue  credit-currency,  but  the  amount  of  such  currency  that  may 
be  issued  should  not  be  based  in  any  fixed  proportion  upon  the 
amount  of  bonds  held.  Merely  to  permit  a  bank  to  increase  the 
proportionate  amount  of  its  circulation  based  upon  bonds  would 
not  achieve  the  desired  result,  for  banks  would  so  order  their 
holding  of  bonds  as  to  get  into  circulation  all  that  the  law  per- 
mitted, and  would  then  be  unable  to  put  out  additional  notes 
unless  they  obtained  additional  bonds. 

NO   SUBSTITUTION   FOR   BOND-SECURED   NOTES. 

It  should  not  be  possible  for  banks  to  substitute  this  new 
credit  currency  for  their  present  bond-secured  circulation  to  such 
an  extent  as  to  lead  to  extensive  sales  of  government  bonds  by 
the  banks  and  to  the  depression  of  their  market  value.  Legis- 
lation leading  to  such  a  result  would  be  tantamount  to  a  viola- 
tion of  vested  interests,  and  almost  certain  to  enlist  the  hostility 
of  banks.  Any  such  result  may  be  avoided  by  the  provision  that 
no  bank  shall  have  the  right  to  issue  credit  currency  unless  its 
bond-secured  circulation  amounts  to  a  definite  proportion  of  its 
capital,  say  50  per  cent.  The  bond-secured  circulation  of  the 
National  banks  at  the  present  time  equals  about  60  per  cent,  of 
their  total  capital.  Some  banks  have  issued  circulation  much  in 
excCvSS  of  50  per  cent,  of  their  capital,  while  others  have  issued 
only  the  minimum  required  by  law,  which  is  in  no  case  more 
than  25  per  cent,  of  capital.  If  the  right  to  issue  credit-currency 
were  extended  only  to  banks  whose  bond-secured  circulation 
equals  50  per  cent,  of  their  capital,  while  some  banks  might  be 
under  an  inducement  to  sell  part  of  their  bonds,  others  would  be 
under  a  similar  inducement  to  increase  their  holdings  and  no 
serious  disturbance  of  the  bond  market  would  be  likely  to  ensue. 

PROPOSED   IvIMIT  OF  ISSUE. 

Banks  should  be  permitted  by  law,  as  at  present,  to  issue 
bond-secured  circulation  to  the  full  amount  of  their  capital,  and 
no  bank  should  be  under  any  compulsion  to  issue  the  new  credit 

12 


currency  to  be  provided  for,  or  to  assume  any  responsibilities  not 
imposed  by  existing  law. 

The  amount  of  credit  currency  which  a  bank  may  issue 
should  bear  a  fixed  proportion  to  its  capital  stock.  Estimating 
the  amount  of  new  currency  needed  by  the  country  during  the 
crop-moving  season  at  $150,000,000,  which  is  about  20  per  cent, 
of  the  present  capitalization  of  National  banks,  it  would  seem 
that  an  adequate  supply  of  new  currency  would  be  provided  in 
the  fall  if  banks  were  permitted  to  issue,  in  addition  to  their 
bond-secured  circulation,  notes  equal  to  25  per  cent,  of  their 
capital  stock.  But  as  some  banks  might  not  avail  themselves  of 
the  privilege,  and  as  others  would  doubtless  succeed  in  substitu- 
ting these  new  notes  for  a  portion  of  their  present  bond-secured 
notes,  it  is  probable  that  the  limit  of  issue  might  well  be  fixed  at 
35  per  cent,  of  a  bank's  capital 

In  order  that  there  shall  be  no  over-issue  or  inflation  the  fol- 
lowing preventive  measures  are  to  be  recommended  : 

ADEQUATE  FACII.ITIES   FOR   REDEMPTION. 

( I )  That  there  should  be  convenient  and  adequate  facilities 
for  the  redemption  of  bank  notes  is  of  the  first  importance. 
These  could  be  assured  by  the  provision  that  notes  of  every 
National  bank  should  be  redeemable  at  sub-treasuries  and  other 
convenient  points.  The  redemption  of  bank  notes  should  be  so 
easy  and  inexpensive  that  none  would  remain  in  circulation  after 
the  need  for  them  is  past.  At  the  present  time  the  only  general 
redemption  agency  for  National  bank  notes  is  in  Washington.  On 
account  of  the  location  of  that  city,  banks  west  of  the  Alleghany 
Mountains  send  in  very  few  notes  of  other  banks  for  redemption, 
but  prefer  to  treat  them  as  counter  money,  even  though  they  have 
an  excessive  supply  on  hand,  rather  than  incur  the  expense  and 
loss  of  interest  incident  to  their  shipment  to  Washington  for  re- 
demption .  The  records  of  the  Redemption  Bureau  at  Washington 
show  that  nearly  60  per  cent,  of  the  notes  presented  for  redemp- 
tion come  from  New  York  City  alone.  Of  the  remaining  40  per 
cent,  about  one  half  come  from  Philadelphia,  Baltimore  and 
other  eastern  cities.  If  the  volume  of  bank  notes  is  to  vary 
sensitively  and  automatically  with  the  need  for  them,  there  must 

13 


be  incessant  daily  redemption,  and  this  can  be  had  only  when  the 
redemption  points  are  so  numerous  that  no  bank  will  be  more 
than  24  hours  distant  from  one.  When  a  properly  distributed 
redemption  system  is  in  operation,  few  banks  will  voluntarily  pay 
out  the  notes  of  other  banks ;  for  it  will  be  to  the  advantage  of 
each  bank  to  pay  out  its  own  notes  and  send  in  the  notes  of  other 
banks  for  redemption  in  lawful  money,  thus  increasing  its  re- 
serve and  multiplying  its  power  to  make  loans.  So  important  is 
the  prompt  redemption  of  notes  that  if  it  were  practicable  we 
would  favor  a  law  prohibiting  National  banks  from  paying  out 
the  notes  of  other  banks  whenever  received  from  individual 
depositors. 

A  GRADUATED  TAX   UPON  NOTE  ISSUES. 

(  2  )  The  second  measure  for  the  prevention  of  excessive  issues 
would  impose  a  restraint  of  a  more  direct  and  obvious  character. 
It  consists  of  a  graduated  tax  imposed  upon  the  issue  of  notes, 
the  tax  rising  as  the  ratio  of  issues  increases.  For  example, 
assuming  that  banks  having  a  bond-secured  circulation  equal  to 
50  per  cent,  of  their  capital  are  given  the  privilege  of  issuing 
additional  notes  equal  to  35  per  cent,  of  their  capital,  let  the  issues 
up  to  5  per  cent,  of  capital  be  taxed  at  the  rate  of  2  per  cent, 
per  annum;  additional  issues  up  to  10  per  cent,  of  capital,  3  per 
cent.;  additional  issues  up  to  15  per  cent,  of  capital,  4  per  cent.; 
additional  issues  up  to  25  per  cent,  of  capital,  5  per  cent. ;  ad- 
ditional issues  up  to  35  per  cent,  of  capital,  6  per  cent.  For 
illustration:  If  a  bank  has  a  capital  of  $100,000  and  has  a  bond- 
secured  circulation  equal  to  or  exceeding  150,000,  then  let  it  have 
the  right  to  issue  $35,000  additional  notes  taxed  as  follows: 

$  5,000  taxed  2  per  cent. 

5,000      "     3    "       " 

5,000  *'  4  "  " 
10,000  '*  5  "  " 
10,000       "     6     "        " 

The  capital  of  National  banks  June  18,  1906,  was 
$826,000,000.  Therefore,  the  maximum  issues  of  bank  notes  in 
excess  of  the  bond-secured  circulation  would  be,  under  present 
conditions,  about  as  follows : 

14 


$  41^300^000  taxed  2  per  cent. 


41,300,000 

"  3 

tf 

(( 

41,300,000 

"  4 

(( 

(( 

82,600,000 

5 

<( 

<t 

82,600,000 

''     6 

(( 

<( 

$289,100,000 

These  figures  on  their  face  seem  unduly  large,  but  that  they 
are  not  is  made  clear  by  the  following  three  considerations : 

1.  The  notes  taxed  at  5  and  6  per  cent,  could  not  be  issued 
by  many  banks  at  a  profit  except  in  time  of  great  stringency.  In 
Canada,  where  banks  are  authorized  to  issue  notes  equal  in 
amount  to  their  capital  stock  without  payment  of  tax  beyond 
that  necessary  to  cover  the  expense  of  issue  and  redemption,  the 
average  profit  from  note-issues  is  computed  to  be  only  2}4  per 
cent.  Yet  the  rate  of  interest  in  Canada  ranges  between  5  and 
6  per  cent.  On  account  of  the  expense  that  would  necessarily  be 
incurred  in  the  issue  and  redemption  of  notes,  if  redemption  were 
incessant  on  account  of  abundant  redemption  facilities,  as  provided 
in  the  plan  recommended  by  this  Committee,  it  is  evident  that  no 
bank,  if  this  plan  were  adopted,  could  profitably  put  forth  a 
taxed  issue  of  notes  except  when  the  market  rate  of  interest  was. 
above  the  rate  of  tax.  Inasmuch  as  the  rate  of  interest  in  this 
country,  except  in  a  few  communities  of  small  bank  capitalization, 
is  seldom  above  6  per  cent.,  it  is  evident  that  the  issues  taxed  at 
5  and  6  per  cent,  would  be  put  forth  only  in  emergencies.  The 
maximum  increase  of  bank  circulation  under  a  tax  of  4  per  cent, 
and  less  would  be  only  $123,900,000. 

2.  Since  some  banks  would  doubtless  not  qualify  for  the 
issue  of  the  taxed  circulation,  the  actual  issue  of  the  taxed  notes, 
even  when  interest  rates  were  high,  would  be  materially  less 
than  the  maximum  allowed  by  law. 

3.  The  abundant  redemption  facilities,  which  banks  would 
freely  utilize  because  of  their  competition  to  get  into  circulation 
their  own  notes  rather  than  those  of  other  banks,  would  make 
it  impossible  for  any  bank  to  keep  outstanding  more  of  its  notes 
than  the  country   had  need  for.     The  volume  of  these  taxed 

15 


(   UNiV£R-.'tV  I 


notes,  on  account  of  this  competition  among  banks,  would  vary- 
in  accordance  with  the  needs  of  business  and  could  never  exceed 
them. 

It  is  evident  that  the  privilege  of  issuing  this  taxed  cir- 
culation, even  though  held  in  reserve  and  seldom  availed  of, 
would  tend  to  steady  the  money  market.  The  knowledge  that 
banks  had  these  notes  in  reserve,  subject  to  their  instant  call, 
would  be  a  source  of  confidence  in  business  and  banking  circles, 
and  would  prevent  that  unreasoning  anxiety  which  is  often  itself 
the  cause  of  stringency.  In  order  that  these  taxed  issues  may 
be  immediately  available  when  needed,  each  redemption  agency 
should  have  in  its  custody,  ready  for  delivery  on  demand,  all  the 
notes  which  each  bank  in  its  district  is  authorized  to  issue. 
These  notes  should,  of  course,  not  be  subject  to  tax  while  lying 
at  the  redemption  agencies. 

A  GUARANTY  FUND  FOR  PROTECTION  OF  THE  NOTES. 

The  proceeds  of  this  graduated  tax  should  be  in  the  custody 
of  the  government  and  should  constitute  a  guaranty  fund  for  use, 
if  needed,  in  the  redemption  of  the  notes  of  failed  banks.  Since 
the  taxes  would  undoubtedly  yield  a  sum  more  than  adequate  for 
this  purpose,  the  Secretary  of  the  Treasury  should  be  given 
authority  to  cover  the  excess  into  the  general  fund  of  the 
Treasury  and  to  invest  a  certain  proportion  of  the  fund  in  govern- 
ment bonds. 

Banking  experience  in  this  and  other  countries  demon- 
strates that  this  guaranty  fund  would  prove  many  times  more 
than  adequate.  Receipts  from  the  existing  tax  on  circulation 
(which  was  one  per  cent,  up  to  the  Act  of  March  14,  1900,  and 
since  then  has  been  in  certain  cases  one-half  of  one  per  cent.) 
were  up  to  June  30,  1905,  $96,220,927.  The  outstanding  notes 
at  time  of  failure  of  banks  whose  affairs  have  been  closed  were 
$17,295,748.  But  upon  general  claims  the  banks  were  able  to 
pay  from  their  assets  70.49  per  cent,  of  liabilities.  If  the  same 
rate  of  loss — about  30  per  cent. — had  been  applied  to  the  bank 
notes,  in  the  absence  of  bonded  security,  the  amount  would  have 
been  $5,190,000.  From  these  figures  it  appears  that  if  the  pro- 
ceeds of  the  tax  had  been  kept  in  a  fund  to  protect  the  notes, 

16 


losses  would  have  been  covered  about  eighteen  times  over,  and 
under  the  higher  taxes  proposed  by  this  Committee  the  excess  of 
the  fund  above  requirements  would  be  much  greater. 

Your  Committee  do  not  believe  it  necessary  that  bank  notes 
should  possess  a  first  lien  upon  the  assets  of  the  issuing  banks. 
The  government,  which  is  bound  to  accept  National  bank  notes 
at  par,  is  in  a  position  to  protect  itself  against  possible  loss,  for  it 
has  ample  powers  of  inspection  and  supervision. 

THE    BANKING    CIRCULATION    HOMOGENEOUS. 

It  should  be  noted  that  under  this  plan  no  additional  form 
of  currency  would  be  created,  for  there  would  be  no  reason  why 
banks  should  issue  two  kinds  of  National  bank  notes.  The 
notes  would  be  alike  in  form,  and  would  be  received  in  pay- 
ment of  debts  to  National  banks  and  to  the  Government,  as  are 
National  bank  notes  under  the  present  law. 

METHOD   OP   REDEMPTION. 

It  would  be  the  duty  of  the  Treasury,  as  at  present,  to  re- 
deem all  the  notes  of  a  failed  bank  in  full  on  presentation  from 
its  5  per  cent,  redemption  fund  and,  after  the  exhaustion  of  that 
fund,  from  the  general  guaranty  fund  derived  from  the  tax  on 
circulation.  For  such  advances  the  Treasury  would  have  a  first 
lien,  as  at  present,  upon  the  proceeds  of  the  bonds  held  to  secure 
circulation,  including  the  premium  on  such  bonds,  and  would 
also  have  a  claim  upon  the  assets  of  the  bank,  ratably  with 
other  creditors,  for  the  entire  amount  of  bank  notes  outstanding 
which  were  not  provided  for  by  the  bonds  or  other  assets  of  the 
bank  in  the  custody  of  the  Treasury.  In  this  way  the  charge 
falling  upon  the  guaranty  fund  would  bear  a  much  smaller  ratio 
to  the  amount  of  notes  outstanding  at  the  time  of  failure  than 
unsecured  claims  would  bear  to  the  aggregate  assets;  and  the 
guaranty  fund  would  profit  by  notes  which  had  been  lost  or 
were  not  presented  for  redemption. 

CREDIT  CURRENCY  WOULD  MOVE  THE  CROPS. 

If  all  the  National  banks  in  the  country,  under  such  a 
plan  as  is  here  outlined,  were  given  the  privilege  of  issuing  credit 

17 


currency,  the  harvesting  of  the  great  crops  of  this  country  would 
be  accomplished  by  means  of  bank  notes  and  not  with  law- 
ful money,  as  at  the  present  time.  The  lawful  money  reserves 
of  banks  in  financial  centers  would  no  longer  be  depleted  in  the 
autumn  in  order  that  harvest  hands  in  Kansas,  Nebraska  and 
Dakota  might  receive  their  wages.  Practically  all  payments 
of  sums  of  $5  and  upwards  in  the  agricultural  regions  would  be 
made  with  bank  notes,  a  large  proportion  of  which  would  doubt- 
less be  supplied  by  the  country  banks  themselves.  In  December 
and  January,  these  notes,  having  done  their  work,  would  be  de- 
posited in  country  banks  and  would  thence  be  sent  either  to 
reserve  cities   or   direct    to    the   nearest    redemption    agencies. 

'  REPEAI.  OP  $3,000,000   RESTRICTION. 

Your  Committee  concur  with  the  recommendation  made  by 
the  regular  Committee  on  Finance  and  Currency  last  spring, 
that  the  restrictive  provision  in  the  following  section  of  the  Na- 
tional Bank  Act  should  be  repealed  : 

*'Sec.  9.  (As  amended  by  Act  of  March  14,  1900.)  That 
any  National  banking  association  now  organized  or  hereafter 
organized,  desiring  to  withdraw  its  circulating  notes,  upon  a 
deposit  of  lawful  money  with  the  Treasurer  of  the  United 
States,  as  provided  in  Section  4  of  the  Act  of  June  20,  1874, 
or  as  provided  in  this  Act,  is  authorized  to  deposit  lawful 
money  and  withdraw  a  proportionate  amount  of  the  bonds  held 
as  security  for  its  circulating  notes  in  the  order  of  such  deposits: 
Provided,  That  not  more  than  three  millions  of  dollars  of  lawful 
money  shall  be  deposited  during  anj^  calendar  month  for  this 
purpose.'' 

The  only  effect  of  this  restrictive  provision  is  to  increase 
the  rigidity  of  the  bond-secured  circulation.  The  repeal  of 
this  clause  would  be  positively  necessary  if  banks  were  to 
issue  notes  subject  to  a  graduated  tax.  Otherwise  the  issue 
of  highly  taxed  currency  would  be  attended  by  too  g^eat  risk, 
for  the  interest  rate  in  any  locality  might  decline  soon  after 
such  issue,  whereas  considerable  time  might  elapse  before  the 
notes  of  its  banks  would  be  returned  for  redemption. 

18 


CASH   BAI.ANCE   OF   THB   FEDERAL   TREASURY. 

The  laws  regulating  the  operations  of  the  Federal  Treasury 
should  be  amended.  These  operations  at  the  present  time  are  a 
constant  menace  to  business.  Excessive  revenues  take  money 
out  of  circulation,  while  deficient  revenues  are  equivalent  to  in- 
flation. Both  these  evils  would  be  avoided,  as  we  have  already 
pointed  out,  if  a  central  government  bank  were  created.  If  this 
be  not  done,  then  the  Secretary  of  the  Treasury  should  have 
authority  to  deposit  in  National  banks  money  received  from  cus- 
toms duties  as  well  as  that  from  other  sources,  either  on  proper 
securities  in  addition  to  those  now  required  by  law,  or  upon  the 
payment  of  interest.  In  our  opinion,  all  surplus  money  of  the 
Treasury  above  a  reasonable  working  balance  should  be  thus 
deposited  in  the  banks. 

SCOPE  OF  THE  PROPOSED    PI,AN. 

In  seeking  to  give  greater  elasticity  to  the  currency,  it  has 
been  thought  best  to  recommend  a  plan  which  would  accomplish 
the  desired  result  most  simply.  A  similar  result  might  be  obtained 
by  various  other  methods,  several  of  which  having  much  merit 
were  presented  to  your  Committee.  Among  plans  thus  presented 
were  some  which  involved  the  principle  of  co-operation  by 
clearing  houses  in  determining  whether  additional  bank-notes 
should  be  issued  or  not,  and  even  the  formation  by  clearing 
houses  of  responsible  corporations  for  the  issue  of  notes;  others 
which  involved  giving  discretion  to  the  Comptroller  of  the  Cur- 
rency in  regard  to  issues,  and  others  which  proposed  to  give  a 
similar  discretion  to  a  commission  to  be  appointed  for  the  purpose. 

While  some  of  these  plans  had  many  merits,  and  perhaps 
even  some  advantages  in  theory  over  the  plan  recommended  by 
your  Committee,  it  was  felt  that  no  plan  would  stand  the  test  of 
discussion  in  Congress  or  in  the  banking  community  which  should 
not  accord  equal  privileges  to  all  members  of  the  National  banking 
system.  The  clearing  houses  are  not  incorporated  under  Federal 
law.  They  represent  only  certain  cities,  and  generally  include, 
in  addition  to  National  banks,  those  which  are  not  members  of  the 
National  banking  system.  While  these  objections  might  be 
surmountable,  your  Committee  felt  that  any  grant  of  discretion, 

19 


whether  to  an  individual  or  a  committee,  especially  if  it  appeared 
to  the  public  to  give  control  of  the  volume  of  circulation  to  a 
small  group  of  bankers, — even  if  such  power  were  exercised  in 
a  conscientious,  intelligent  and  far  sighted  manner, —  would  lead 
to  suspicions  and  charges  of  favoritism  and  injustice,  such  as 
stimulated  the  attacks  upon  the  Second  Bank  of  the  United  States 
and  have  been  repeatedly  made  against  the  Secretary  of  the 
Treasury  for  his  policy  in  regard  to  deposits  of  public  moneys. 

It  has  been  suggested  to  the  Committee  that  a  practical 
method  of  putting  into  operation  the  principle  of  a  bank  note 
credit  currency  would  be  to  have  Congress  recognize  this  principle 
by  authorizing  banks,  through  a  voluntary  association  of  their 
own,  to  make  such  issues  within  certain  limitations  and  subject 
to  a  joint  guaranty  by  the  participating  banks;  the  details  of  such 
guaranty  and  the  provisions  for  safety  to  be  devised  by  the  banks 
themselves  subject  to  the  approval  of  the  Comptroller  of  the 
Currency.  Your  Committee  see  practical  difficulty  in  securing 
the  representative  judgment  of  the  bankers  to  devise  the  details 
of  such  a  plan,  but  we  are  so  clearly  convinced  of  the  desirability 
of  the  application  in  some  form  of  the  principle  of  a  credit  cur- 
rency that  we  would  heartily  endorse  this  plan  if  Congress  and 
the  banking  interests  approved  it. 

AN  AUTOMATIC  SYSTEM   DESIRABI^K. 

In  view  of  these  considerations,  your  Committee  came  de- 
cidedly to  the  conclusion  that  any  system  recommended  should 
be  automatic  in  its  operation,  in  the  sense  that  it  should 
afiEord  equality  of  treatment,  under  uniform  conditions,  to  all 
National  banks,  and  should  leave  the  net  volume  of  bank-note 
circulation  to  be  determined  by  the  interplay  of  the  interest  of 
the  banks  among  themselves,  rather  than  to  the  decision  of  any 
single  official  or  banker  or  group  of  officials  or  bankers. 

EXISTING   CONDITIONS   MUST   BE   CONSIDERED. 

It  should  not  be  overlooked  that  in  proposing  new  legislation 
such  a  body  as  the  Chamber  of  Commerce  is  bound  to  consider 
conditions  as  well  as  theory.  Your  Committee  did  not  feel,  there- 
fore, that  they  were  required  or  expected  to  build  up  a  theoretical 

20 


structnre  which  might  if  enacted  be  a  sound  substiti 
existing  monetary  system  of  the  United  States,  but  rather  to 
address  themselves  to  such  evils  as  are  capable  of  correction 
by  simple  legislation. 

GROWTH    OF    SEJNTIMKNT    FOR   I^i^GISLATlON. 

We  have  taken  some  pains  to  ascertain  the  sentiments  of 
representative  bankers  throughout  the  country  and  are  of  the 
opinion  that  a  majority  of  the  bankers  of  the  United  States 
appreciate  the  necessity  for  a  variable  and  elastic  element  in  the 
currency  and  will  heartily  co-operate  with  the  bankers  of  New 
York  City  in  an  effort  to  secure  an  amendment  to  the  existing 
law.  The  subject  is  one  in  which  the  whole  country  is  interested. 
New  York  City,  because  it  is  the  financial  center,  its  banks  hold- 
ing large  sums  of  money  belonging  to  country  banks,  appears  to 
suffer  most  from  the  present  rigidity  of  the  currency,  for  every 
fall  its  rnoney  markets  are  suddenly  stripped  of  reserve  funds. 
As  a  result  the  rate  of  interest  on  demand  loans  in  New  York 
City  always  fluctuates  greatly  during  this  season  and  often 
reaches  heights  which  not  only  amaze  foreigners  but  cause  them 
to  doubt  our  financial  stability.  When  we  consider,  however, 
the  magnitude  of  business  operations  in  New  York  as  compared 
with  those  of  other  parts  of  the  country,  and  take  into  account 
the  fact  that  the  commercial  rate  of  interest  in  this  city  is  ad- 
vanced no  more  than  elsewhere,  while  the  excessive  rates  on  call 
loans  are  paid  on  comparatively  small  borrowings,  we  are  of 
opinion  that  the  evils  inflicted  on  New  York  by  the  defects  of  the 
present  currency  system  are  no  greater  than  those  endured  by  other 
sections. 

NKW   YORK   CITY  SHOUIvD   TAKE  INITIATIVE. 

Nevertheless  we  find  among  bankers  of  this  country  a 
conviction  that  this  is  a  problem  in  the  solution  of  which  the 
bankers  of  New  York  City  should  take  the  initiative.  We  also 
find  the  same  opinion  prevailing  among  representative  business- 
men. They  realize  that  the  hardship  caused  by  a  faulty  cur- 
rency system  is  borne,  not  by  the  banks,  but  by  the  public  in 
general;  and  resolutions  have  been  adopted  almost  unanimously 

21 


by     several    prominent    business  organizations    favoring  such 
amendmeut  of  the  National  banking  laws  as  will  give  relief. 

There  is  reason  also  for  believing  that  no  important  finan- 
cial measure  will  receive  favorable  consideration  in  Congress  un- 
less it  has  the  endorsement  of  representative  bankers.  Such 
being  the  case,  we  are  of  opinion  that  the  bankers  of  New 
York  City,  ought  to  take  up  this  question  and  reach  an  agree- 
ment upon  some  satisfactor}^  measure.  If  they  do  this,  hav- 
ing in  mind  the  welfare  and  needs  of  the  entire  countr}^,  as 
their  own  best  interests  would  dictate,  w^e  are  hopeful  that 
their  recommendations  will  meet  with  approval  among  the 
bankers  in  every  State  of  this  Union  and  be  enacted  into  law 
by  Congress  without  unnecessary  delay. 

SUMMARY   OF   THIS   REPORT- 

In  order  that  the  members  of  the  Chamber  may  have  before 
them  in  brief  space  the  recommendations  of  this  Committee, 
together  with  the  important  considerations  upon  which  thej-  are 
based,  w^e  present  herewith  a  brief  summary  of  this  report. 

We  find  that  our  currency  is  seriously  defective  in  that  its 
volume  does  not  vary  with  the  demand,  so  that  the  business  of 
the  country  is  alternately  exposed  to  the  evils  of  a  redundant 
and  of  a  deficient  supply. 

When  the  need  for  currency  increases,  as  it  does  ever>^ 
autumn  when  the  crops  are  harvested,  our  banks  are  obliged  to 
pay  out  lawful  money  from  their  reserves,  and  in  consequence  to 
raise  their  rates  of  interest  on  demand  and  time  loans.  These 
operations  are  a  source  of  real  loss  to  the  commercial  and  indus- 
trial interests  of  the  entire  country.  They  work  injury  to  our 
merchants,  to  our  manufacturers,  and  to  our  farmers, — in  short, 
to  all  classes  of  producers. 

When,  on  the  other  hand,  the  supply  of  currency  is  excessive, 
as  it  usually  is  in  the  spring,  the  consequent  congestion  of  banking 
reserves  forces  an  abnormally  low  rate  of  interest  and  so  tends  to 
excite  a  dangerous  speculative  spirit  in  our  marketsand  exchanges. 

We  believe  that  this  oscillation  between  periods  of  contraction 
and  inflation  is  the  direct  consequence  of  the  artificial  and  unnec- 
essary inflexibility  of  our  currency  due  to  restrictions  which  are 


placed  by  law  upon  the  issue  of  bank  notes.  Under  the  existing 
law  National  banks  can  increase  their  issue  of  notes  only  in  pro- 
portion as  they  increase  their  holdings  of  the  United  States  bonds 
which  are  deposited  as  security  ;  and  they  cannot  at  will  regain 
possession  of  the  bonds  by  the  deposit  of  lawful  money  for  the  re- 
tirement of  their  notes.  On  account  of  the  investment  considera- 
tions regarding  bonds  which  are  involved  in  the  issue  of 
National  bank  notes,  we  find  that  this  class  of  currency,  which  in 
most  other  leading  countries  possesses  a  useful  flexibility,  is  here 
i>ssued  and  retired  utterly  without  regard  to  the  country's  vary- 
ing needs  for  currency. 

Notwithstanding  the  inadequacy  of  the  bond-secured  circu- 
lation of  our  National  banks,  our  deliberations  have  brought  us- 
to  the  conclusion  that  it  would  be  unwise  to  disturb  this  circula- 
tion or  to  recommend  anj'^  substitute  for  it  as  it  now  exists,  for 
such  a  course  would  lead  to  an  inequitable  depreciation  of  the 
United  States  bonds  now  outstanding.  In  our  opinion,  how- 
ever, future  issues  of  Government  bonds  should  not  be  made 
available  as  a  basis  for  bank-notes,  for  the  great  increase  in  the 
bond-secured  circulation  that  has  taken  place  within  the  last  six 
years  furnishes  evidence  that  the  existing  system  of  note  issue 
without  adequate  redemption  might  become  dangerous 

We  have  had  brought  before  us  for  consideration  two  classes 
of  remedies  for  existing  evils:— (i)  radical  measures  involving  the 
creation  of  corporations  with  powers  and  privileges  unlike  those 
now  possessed  by  any  American  institution;  (2)  measures  which 
would  enlarge  the  privileges  of  corporations  already  in  existence* 
We  have  deemed  it  best  to  select  from  each  of  these  classes  the  one 
which  we  believe  to  be  the  best.  If  the  country  is  ready  for  a  radical 
addition  to  our  financial  system,  we  believe  that  the  world's 
experience  proves  beyond  question  that  a  central  bank  of  issue 
controlled  b}^  the  Government  ought  to  be  established.  If,  how- 
ever, the  people  of  the  United  States  shrink  from  the  creation  of 
such  an  institution,  we  believe  that  the  wisest  alternative  is  a 
simple  measure  enlarging  the  present  note-issue  privilege  of 
National  banks  in  such  manner  that  their  right  of  issue  shall  not 
vary  with  their  ownership  of  United  States  bonds,  and  under 
such  conditions  that  the  retirement  of  their  notes  when  not 
needed  shall  be  certain  and  automatic. 

23 


We,  therefore,  make  the  following  recommendations: 

I.  That  legislation  be  enacted  which  shall  provide  the 
country  with  a  flexible  and  elastic  bank  note  currency ;  and  to 
this  end  we  suggest  that  either  one  of  the  two  following  plans 
might  wisely  be  adopted : 

(a)  Let  there  be  created  a  central  bank  of  issue  similar 
to  the  Bank  of  Germany  or  the  Bank  of  France ;  such  bank 
to  deal  exclusively  with  banks ;  its  stock  to  be  owned  in  part 
by  banking  institutions  and  in  part  by  the  Government;  but  in 
its  management  representatives  of  the  Government  shall  be 
supreme.  This  central  bank  shall  issue  currency,  rediscount 
for  other  banks,  hold  public  money,  and  act  as  agent  of  the 
Government  in  redeeming  its  paper  money  and  making  its 
disbursements. 

Or  {U)  Let  any  National  bank  whose  bond-secured 
circtilation  equals  50  per  cent,  of  its  capital  have  authority 
to  issue  additional  notes  equal  in  amount  to  35  per  cent- 
of  its  capital. 

Let  such  additional  notes  be  subject  to  a  graduated  tax 
as  follows:  The  first  5  per  cent.,  taxed  at  the  rate  of  2  per 
cent,  per  annum ;  the  second  5  per  cent.,  taxed  at  the  rate 
of  3  per  cent.;  the  third  5  percent.,  taxed  at  the  rate  of  4 
per  cent.;  then  an  issue  equal  to  10  per  cent,  of  capital,  taxed 
5  per  cent. ;  then  an  issue  equal  to  10  per  cent,  of  capital, 
taxed  6  per  cent. 

Let  the  proceeds  of  this  graduated  tax  constitute  a  guar- 
anty fund,  in  the  custody  of  the  Government,  for  the  re- 
demption of  the  notes  of  failed  banks. 

To  insure  the  prompt  retirement  of  notes  when  not 
needed,  let  redemption  agencies  be  established  at  sub-treas- 
uries and  other  convenient  points. 

Let  all  the  notes  of  a  bank  be  alike  in  form,  and  let  it  be 
the  duty  of  the  United  States  Treasury  to  redeem  all  the 
notes  of  a  failed  bank,  as  at  present,  in  full  on  presentation, 
and  to  recoup  itself  from  the  assets  of  the  failed  bank  and 
from  the  guaranty  fund. 

24 


2.  That  the  law  restricting  the  retirement  of  National  bank 
notes  to  $3,000,000  per  month  by  the  deposit  of  lawful  money ^be 
repealed. 

3.  That  future  issues  of  United  States  bonds  be  not  made 
available  as  a  basis  for  the  issue  of  National  bank  notes. 

4.  That  the  laws  regulating  the  operations  of  the  United 
States  Treasury  be  amended  in  such  a  manner  that  they  shall  not, 
as  now,  interfere  with  the  money  market ;  and  to  this  end  we 
suggest  a  law  requiring  that  all  money  in  the  General  Fund  of 
the  Treasury  above  a  reasonable  working  balance  be  deposited 
in  National  banks. 

October  i,  1906. 

John  Ci,A]^i,in,  Chairman. 
Frank  A.  Vanderi^ip, 
IsiDOR  Straus, 
dumont  c1.arke, 
Chari^es  a.  Conant. 
Joseph  French  Johnson,  Secretary. 


98 


APPENDIX 


LETTERS  RECEIVED  FROM  EUROPEAN  BANKERS. 


From  the  Governor  of  the  Bank  of  France. 

Paris,  July  21,  1906. 

Mr.  John  Claflin,  Chairman  Special  Currency  Committee, 

Chamber  of  Commerce  of  the  State  of  New  York. 

Mr.  President :.' 

You  have  done  me  the  honor  to  write  to  ask  from  me 
information  relative  to  the  issue  of  bank  notes  in  France.  I 
hasten  to  meet  your  request  in  passing  successively  under  review 
the  different  questions  which  you  have  thought  proper  to  address 
to  me. 

The  first'  question  is  in  these  terms  : — "Is  the  amount  of  the 
credit  circulation  of  the  Bank  of  France  determined  by  a  fixed 
law  or). by  the  needs  of  commerce?" 

These  two  elements  each  play  a  certain  part.  Until  1848, 
no  absolute  limit  was  imposed  by  law  on  the  issues  of  the  Bank 
of  France.  The  decree  of  March  15,  1848,  establishing  forced 
legal  tender  of  bank  notes,  at  the  same  time  fixed  the  maximum 
of  their  issue  at  350,000,000  francs.  This  provision  was  abro- 
gated at  the  same  time  with  forced  legal  tender  by  the  law  of 
August  6,  1850. 

The  law  of  August  12,  1870,  again  established  forced  legal 
tender  and  imposed  a  limit  of  issue  fixed  at  1,800,000,000.  By 
a  series  of  successive  augmentations,  this  limit  was  carried  from 
1,800,000,000    to   5,800,000,000  (Law  of  February  11,    1906). 

28 


But  from  the  fact  that  these  increases  were  approved  by 
legislative  authority  every  time  that  the  outstanding  circulation 
of  notes  approached  the  legal  limit,  it  resulted  that  in  reality  the 
issue  has  up  to  the  present  time  followed  the  demands  of  com- 
merce. 

These  demands,  moreover,  cannot  be  unlimited.  In  order 
that  they  may  be  considered,  it  is  necessary  that  the  credits 
which  they  tend  to  create  shall  fall  within  the  classes  contem- 
plated by  the  statutes  of  the  Bank, — discount  of  bills  maturing 
within  three  months,  secured  by  three  signatures,  or  two  signa- 
tures supported  by  the  guaranty  of  a  deposit  of  securities;  ad- 
vances on  securities  which  are  acceptable;  advances  on  bullion 
and  money.  The  circulation  not  covered  by  the  cash  reserve  is 
then  limited  in  reality  by  this  fact, — that  notes  cannot  be  issued 
to  satisfy  demands  which  do  not  fulfill  one  or  the  other  of  the 
conditions  above  enumerated.  There  is,  therefore,  a  very  sub- 
stantial guaranty,  by  reason  of  which  when  there  has  been  occa- 
sion to  fix  the  legal  limit,  it  has  been  possible  to  leave  the  circu- 
lation to  adjust  itself  without  restriction  to  the  needs  of  com- 
merce. 

To  your  second  question  also, — ''Has  commerce  suffered  by 
the  limitation  of  issues?" — We  are  able  to  reply  that  the  limit  of 
issues  has  always  been  maintained  at  a  level  sufficiently  high 
that  commerce  has  never  been  exposed  by  the  act  of  the  bank  to 
deficiency  of  means  of  payment. 

Without  doubt  it  has  happened  sometimes  that  during  the 
period  immediately  preceding  the  elevation  of  the  legal  maximum, 
the  credit  circulation  has  approached  so  near  the  limit  that  the 
bank  was  obliged  to  restrict  its  issues  and  to  give  the  public 
metallic  money  in  place  of  notes,  but  this^^in  a  proportion  too 
small  and  during  too  brief  a  period  for  it  to  result  really  in  dis- 
turbance of  commercial  customs. 

The  amount  of  the  circulation  is  generally  lowest  from  July 
to  September,  and  attains  its  maximum  in  the  first  and  last 
months  of  the  year.  This  variation  arises  from  the  diminished 
activity  of  commercial  operations  during  the  summer  season.  If 
we  establish  a  monthly  mean  of  the  circulation  from  January  i , 
1 90 1,  to  June  30,  1906,  the  following  figures  result : 

39 


January 4,438,000 

February 4,386,000 

March 4,346,000 

April 4,374,000 

May 4^335)000 

June 4,255,000 

July 4,214,000 

August 4, 150,000 

September 4, 147,000 

October 4,271,000 

November 4,301,000 

December 4,292,000 

I  append  elsewhere  to  the  present  letter  a  more  detailed  table 
giving  for  the  same  period  and  for  each  year  the  monthly  average 
of  the  circulation  of  notes.  This  table  will  enable  you  to  under- 
stand the  small  relative  importance  of  the  periodical  variations 
on  the  subject  of  which  you  wish  to  be  informed. 

The  limitation  of  the  right  of  issue  by  the  operation  of  re- 
strictive clauses  might  provoke  an  abnormal  rise  in  the  rate  of 
discount, — that  is,  a  rise  not  justified  by  the  commercial  situa- 
tion. If,  in  effect,  the  circulation  was  on  the  point  of  attaining 
its  legal  maximum,  and  new  demands  appeared,  the  Bank  would 
no  longer  be  able  to  meet  them  except  by  means  of  its  metallic 
resources,  and  even  this  means  might  fail  if  the  figure  of  the  re- 
serve entered  as  a  co-efficient  into  the  determination  of  the  limit 
of  issue.  But  outside  of  this  consideration  even,  the  necessity  of 
maintaining  its  reserves  would  constrain  it  to  raise  the  rate  of 
discount  with  a  view  of  diverting  a  part  of  the  demands  The 
conditions  of  credit  would  thus  be  rendered  more  rigorous  by  the 
intervention  of  restrictive  legislation. 

But  the  Bank  of  France,  as  has  been  said  in  response  to  the 
first  question,  is,  on  the  contrary,  placed  from  this  point  of  view 
under  a  very  liberal  regime,  which  permits  the  circulation  to 
expand  in  proportion  to  the  real  needs  of  credit.  Its  rate  of  dis- 
count is  not  subjected  to  the  artificial  cause  of  elevation  which 
would  result  from  an  automatic  limitation  of  the  issue.  The 
power  to  consider  favorably  all  the  demands  which  are  presented 
in  the  form  of  security  easily  realizable,  assures  to  commerce  the 
most  moderate  rates  which  are  compatible  with  the  constitution 
and  maintenance  of  a  strong  cash  reserve. 

30 


A  second  table  annexed  to  the  present  letter  will  indicate  to 
you  the  different  rates  of  discount  in  force  at  the  Bank  of  France 
during  the  last  thirty  years.  Perhaps  the  comparison  of  these 
figures  with  the  similar  figures  which  are  disclosed  by  the 
accounts  of  other  banks  founded  on  a  different  principle  will  be 
of  a  nature  to  furnish  you  useful  suggestions. 

You  have,  in  conclusion,  expressed  the  desire  to  know  my 
opinion  upon  this  final  question,  '  *Has  the  power  to  issue  notes 
in  conformity  with  the  needs  of  commerce  contributed  to  in- 
crease and  protect  the  metallic  reserve  of  the  bank?' ' 

I  think  that  here  it  is  necessary  to  make  a  distinction.  If 
the  limit  of  issue  fixed  by  the  law  is  independent  of  the  amount 
of  the  metallic  reserve,  it  seems  that  aVestrictive  clause  might  be 
an  obstacle  to  the  increase  of  this  reserve.  The  bank  in  effect 
would  not  be  able  to  receive  bullion  indefinitely,  since  from  a 
certain  moment  it  would  be  forbidden  to  issue  notes  against  it. 
On  the  other  hand,  in  order  to  satisfy  the  needs  of  commerce,  it 
would  be  lead,  once  the  limit  of  issue  was  attained,  to  conduct  its 
discounts  by  means  of  metallic  money  and  thus  to  impoverish  its 
metallic  reserves. 

But  the  same  consequences  would  not  be  produced,  in  my 
opinion,  if  the  limit  of  issue  bore  a  relation  to  reserve.  The  bank 
would  always  be  able  to  receive  bullion  in  exchange  for  notes 
and  as  soon  as  the  issue  touched  its  maximum,  it  would  forbid 
either  discounts  in  notes  or  discounts  in  metallic  money  which 
would  modify  the  legal  proportion  of  the  reserve  to  the  cir- 
culation. 

I  hope,  Mr.  President,  that  the  information  which  I  have 
the  honor  to  transmit  to  you  will  be  of  a  nature  to  afford  you 
satisfaction,  and  I  shall  be  happy  to  take  occasion  to  complete  it 
in  conferring  with  Mr.  Charles  A.  Conant  on  the  questions  which 
interests  you. 

Please  accept,  I  beg  of  you,  Mr.  President,  the  expression  of 
my  most  distinguished  sentiments. 

GEORGES  PALLAIN. 


31 


OS-  7 


r 


From  the  President  of  the  Imperial  Bank  of  Germany. 

Berlin,  July  21,   1906. 

Mr.  John  Claflin,  Chairman  Special  Currency  Committee, 

Chamber  of  Commerce  of  the  State  of  New  York. 

Dear  Sir : 

Inasmuch  as  we  have  now  had  the  desired  conference  as 
requested  in  your  letter  of  the  19th  of  this  month  with  Mr.  Charles 
A.  Conant,  I  now  beg  to  explain  in  detail  the  various  points 
touched  upon  in  said  conference. 

According  to  Paragraph  17  of  the  Banking  Law  of  March 
14th,  1875,  the  Reichsbank  is  obligated  at  all  times  to  cover  the 
amount  of  notes  in  circulation  to  the  extent  of  at  least  one- 
third  in  current  German  money,  that  is,  money  issued  by  the 
Government,  or  with  gold  in  bars  or  foreign  coin  on  the  basis  of 
the  price  of  Mk.  1392  per  Pound  1000  fine,  and  the  balance  of  the 
circulation  to  be  covered  by  discounted  bills,  the  life  of  which 
does  not  exceed  three  months,  and  which,  as  a  rule,  must  have 
three,  or  at  least  two,  signatures  or  obligators  whose  solvency  is 
beyond  doubt. 

The  amount  necessary  to  cover  the  notes  in  circulation  by 
cash  averaged,  during  the  last  three  years,  1903  to  1905,  Mk. 
932,065,000;  Mk.  952,681,000  and  Mk.  999,111,000,  so  that  a 
note-issue  on  this  basis  could  have  been  made  to  the  extent  of 
2,796,195.000,  2,858,043,000  and  2,997,333,000  Marks. 

As  a  matter  of  fact  the  issue  during  this  period  amounted 
only  to  1,248,718,000,  1,288,549,000  and  1,335,701,000  Marks, 
from  which  you  will  see  that  the  maximum  was  not  even  ap- 
proached. 

According  to  Paragraph  9  of  the  Banking  Law,  banks 
whose  circulation  exceeds  a  percentage  of  cash  means  according 
to  the  amount  definitely  fixed  for  each  bank,  which  is  called  its 
contingent  circulation,  must  pay  a  tax  of  5^  per  annum  to  the 
Government  as  assessed  on  such  excess  circulation.     I  may  men- 


tion  that  the  Bank  notes  of  other  German  banks  can  be  counted 
as  cash  means. 

The  contingent  circulation  of  the  Reichsbank  was  originally 
set  at  Mk.  250,000,000.  This  has  been  increased  up  to  the  close 
of  the  year  1900  through  the  amount  abandoned  by  other  banks, 
so  that  on  January  i,  1 901,  the  contingent  circulation  of  the 
Reichsbank  was  fixed  at  Mk.  293,400,000,  and  since  then  has 
been  increased  to  Mk.  450,000,000,  and  has  since  through  ad- 
ditions increased  so  that  it  now  stands  as  Mk.  472,829,000. 

On  the  average  basis  the  Reichsbank  has  never  taken  ad- 
vantage of  its  full  contingent  circulation.  During  the  year  1903 
although  the  circulation  has  exceeded  its  cash  means  on  an 
average  of  about  Mk.  306,210,000,  316,486,000  and  316,466,000. 

During  stated  periods  of  the  years  aforesaid  an  excess  of 
circulation  has  occasionally  occurred. 

In  consequence  of  the  development  of  economic  life  the  con- 
stant changing  needs  of  commerce  has  caused  as  a  consequence 
an  excess  of  uncovered  circulation  from  time  to  time,  and  this 
period  is  particularly  found  in  the  days  of  the  quarter  end,  and 
the  amounts  have  at  times  been  very  heavy.  But  on  other 
occasions  there  has  been  no  necessity  at  all  for  an  excess 
circulation. 

The  course  of  other  circulation  during  the  years  1903  to 
1906  can  be  seen  from  the  enclosed  diagram. 

The  margin  between  the  maximum  amount  of  uncovered 
circulation  and  the  minimum  caused  by  the  requirements  of 
trade  evidences  an  elasticity  for  the  year  1903  of  Mk.  642,947,000 
for  1904,  Mk.  663,840,000  for  1905  and  Mk.  959,256,000,  and 
for  the  period  from  Jan.  i,  1906,  to  June  30,  1906,  of  Mk. 
628,765,000. 

The  amount  of  the  5^  tax  paid  to  the  Government  was  for  the 
years  1903  to  1905,  respectively,  Mk.  805,267.44,  1,118,373.21 
and  1,651.003.17. 

The  over-issue,  however,  did  not  necessarily  cause  a  rise  in 
the  officiardiscount  rate,  inasmuch  as  more  weight  was  given  to 
the  cause  and  the  manner  of  the  money  requirements  than  to  the 
amount  that  was  used,  in  deciding  upon  the  policy  of  the  bank, 

33 


and  furthermore,  in  consideration  of  an  early  return  to  normal 
conditions  the  administration  of  the  bank  very  often,  notwith- 
standing that  the  over-issue  was  quite  important,  suffered  the 
lower  discount  rate  to  stand  and  preferred  to  sacrifice  its  own 
profits  in  paying  the  tax  out  of  its  own  pockets. 

For  instance,  the  bank,  as  you  will  see  by  the  enclosed 
diagram,  retained  its  official  discount  rate  during  the  entire  period 
from  Januar}^  1903,  to  October,  1904,  at  ^i,  and  at  one  time 
even  at  3)^^,  although  the  contingent  amount  w^as  exceeded 
thirteen  times. 

From  experience  in  the  past,  as  you  will  see  by  the  fore- 
going, the  system  adopted  in  connection  with  the  over-issue  of 
notes,  has  been  very  successful.  As  there  is  no  definite  boun- 
dary line  for  the  uncovered  note-issue,  it  has  l^een  made  possible 
for  the  Reichsbauk  administration  to  satisfy  at  all  times  the 
changing  demands  of  commerce  by  arranging  its  circulation 
accordingly,  and  even  in  times  of  extraordinary  stress  it  was 
enabled  to  place  at  the  disposal  of  the  general  commercial  com- 
munity the  necessary  provision  for  a  circulating  medium  without 
unduly  increasing  the  official  rate  of  discount,  and  in  the  same 
manner  an  unhealthy  expansion  of  the  uncovered  note  issue 
by  means  of  the  penalty  incurred  through  the  government  tax 
has  been  avoided. 

I  w^ould  further  refer  you  to  a  monograph  entitled  ^'The 
Reichsbank  from  1876  to  1900,"  and  particularly  to  the  chapter 
commencing  at  page  43. 

And  further  I  would  refer  to  another  work  published  by  me 
entitled  the  ' '  Imperial  Laws  Covering  Discount  and  Banks  of 
Issue,  Paper  Money,  Lottery  Bonds  and  State  Indebtedness," 
and  particular! 3^  1  would  refer  to  the  introduction  on  pages 
I   to  43. 

These  two  books  I  have  handed  to  Mr.  Conant  personally. 
I  at  the  same  time  handed  him  tables  referring  to  remarks  on 
pages  294  and  300,  etc. 

I  am  ready  to  impart  any  further  information  if  it  is  desired, 
and  in  the  meantime,  am, 

Yours  respectfully, 

A.   KOCH. 

34 


From  the  flaoaging  Director  cf  the  Deutsche  Bank,  Berlin. 

Berlin,  W.,  July  26,  1906. 

Mr.  John  Claflin,  Chairman  Special  Currency  Committee, 

Chamber  of  Commerce  of  the  State  of  New  York. 

Dear  sir: 

Mr.  Charles  A.  Conant  brought  me  your  esteemed  favor  of 
the  19th  of  June,  and  I  have  pleasure  in  replying  to  your  in- 
quiries. 

Prior  to  Germany's  unification  there  reigned  great  confusion 
in  this  country's  currency  arrangements.  The  several  states 
that  formed  the  Confederation  had  five  different  monetary  sys- 
tems and  different  coins,  legal  tender  notes  issued  by  many 
Governments  and  a  large  number  of  issuing  banks,  government 
and  private.  All  this  was  changed  after  Germany  had  achieved 
her  unity.  Practical  business  men,  such  as  the  late  Mr.  Bam- 
berger and  Doctor  George  Siemens,  were  consulted  and  assisted 
Prince  Bismarck's  Government  in  preparing  and  carrying  into 
effect  new  laws  regulating  Germany's  monetary  and  banking 
system.  The  coinage  w^as  reformed  by  the  law  of  9th  July,  1673, 
and  another  law  of  14th  March,  1875,  regulated  the  issue  of 
bank  notes.  These  two  laws,  with  slight  modifications,  have 
remained  the  basis  of  Germany's  currency  system. 

You  are  aware,  that  Germany  has  a  gold  currency,  and  I 
may  here  mention  that  more  gold  coin  is  circulating  in  this 
country,  comparatively,  than  in  most  of  all  others,  because  the 
use  of  checks  is  not  yet  as  general  with  us  as  it  is  in  3^our  coun- 
try or  in  Great  Britain. 

Silver  coins  are  circulating  only  as  token  money.  The  old 
Thalers  (a  coin  equivalent  to  3  marks),  which  had  imtil  recently 
full  value  as  legal  tender,  are  being  rapidly  re-coined  into  pieces 
of  the  Reichsmark  system.  There  is  a  slight  excess  in  coins  of  5 
marks,  which  are  not  liked  by  the  public,  although  they  are 
smaller  than  would  be  a  silver  dollar  equivalent  in  value  to  one 

dollar  gold. 

35 


Secondly,  and  as  a  surrogate  for  coins,  there  is  in  circulation 
a  small  amount  of  Government  notes,  equivalent  to  your  green- 
backs. But  the  total  amount  of  these  notes,  which  are  circulat- 
ing in  small  denominations  down  to  five  marks,  is  limited  to  120 
millions  marks  (less  than  30  millions  of  dollars),  and  the  total 
equivalent  of  these  notes  is  deposited  in  gold  coin  in  the  fortress 
of  Spandau,  near  Berlin,  and  can  be  used  in  case  of  war  only. 

Thirdly  and  lastly  the  money  circulation  of  Germany  con- 
sists of  bank  notes.  These  are  issued  by  the  Reichsbank  and 
four  banks  of  the  minor  States  of  the  German  Confederation. 
The  number  and  importance  of  such  minor  banks  is  decreasing 
constantly;  they  are  following  in  their  discount  policy  the  lead 
of  the  Reichsbank,  and  for  all  practical  purposes  and  particularly 
for  investigations  of  the  kind  you  have  in  view  the  Reichsbank 
alone  need  be  examined. 

You  are  aware  that  the  Bank  of  England  has  lent  the  par 
value  of  its  entire  capital  stock  to  the  British  Government,  and 
that  the  Bank  is  allowed  to  issue  notes  not  covered  by  gold  up  to 
the  amount  of  such  capital  stock  and  up  to  that  amount 
only.  Now,  although  the  Bank  of  England  is  admirably 
managed,  this  system,  owing  to  its  being  inelastic,  has  not 
withstood  severe  strain.  You  are  aware  that  the  Bank  of 
England's  Act  had  to  be  suspended  several  times  since  its 
enactment,  or,  as  the  familiar  expression  says,  the  Bank  has 
been  broken. 

You  are  aware  also,  no  doubt,  that  the  example  of  the  Bank 
of  England  has  been  followed  in  Spain,  in  Argentina  and  in  other 
countries  with  poor  and  even  disastrous  eiffects. 

The  system  of  issuing  bank  notes  against  Government 
security  must  be  admitted  to  be  faulty,  although  the  sage  use  of 
that  system  in  England  and  in  the  United  States  may  seem  to 
prove  the  contrary,  but  only  show  that  the  practice  is  worth 
more  than  theory. 

The  German  system  of  bank  note  regulation,  being  the 
latest,  could  make  profit  of  the  experience  of  other  countries  and 
must  be  admitted  to  be  the  best.  Indeed  it  has  been  followed 
since  its  enactment  wherever  currency  reform  on  a  gold  basis  had 
to  be  introduced. 

36 


The  advantage  of  our  bank  note  system  consists  in  its 
elasticity. 

The  Reichsbank  is  a  joint  stock  company,  but  its  managing 
directors  are  nominated  by  the  Government. 

The  notes  issued  by  the  Reichsbank  are  not  a  legal  tender. 

The  Bank  is  legally  bound  to  redeem  its  notes  in  coin  oh 
demand. 

All  notes,  which  any  one  of  the  five  banks  may  issue,  must 
be  covered  by  coin  and  gold  in  bars,  or  by  bills  of  exchange  hav- 
ing not  more  than  three  months  to  run,  but  the  restrictions 
whereunder  the  Reichsbank  may  discount  bills  are  very  severe, 
and  under  no  circumstances  must  the  coin  and  gold  held  be  less 
than  one  third  of  the  total  circulation. 

Further,  it  is  a  law,  that  the  Reichsbank,  as  well  as  the 
other  four  banks,  pay  a  tax  to  the  Imperial  Exchequer  as  soon 
as  their  circulation  exceeds  the  amount  of  the  coin  and  gold  held, 
plus  an  arbitrary  amount  fixed  by  experience  at  somewhat  over 
$2  per  capita  of  Germany's  population.  The  exact  figure  of  this 
arbitrary  amount  or  "Kontingent,"  as  it  is  called,  is  for  the 
Reichsbank  472,829,000  marks,  for  the  Bank  of  Bavaria  32  mil- 
lions, of  Saxony  16,771,000,  of  Wurtemberg  10  millions,  and  of 
Baden  10  millions,  making  a  total  of  541,600,000  marks,  or  say 
130  millions  dollars. 

As  soon  as  the  Reichsbank  or  any  one  of  the  other  four 
banks  has  issued  notes  to  a  larger  amount  than  its  legal  share  in 
the  above  mentioned  541.6  millions  marks,  then  a  tax  of  five  per 
cent,  is  levied  by  the  Empire  on  any  excess  issue.  This  tax  is 
payable  by  forty-eighths.  Thus,  if  the  balance-sheet  which  the 
several  banks  are  bound  to  publish  weekly,  shows  an  excess  in 
any  one  week,  the  tax  is  5/48^  on  the  amount  of  such  excess. 

This  stipulation  which,  when  introduced,  was  quite  new  and 
an  experiment,  has  proved  a  decided  practical  success. 

The  table  herewith  enclosed  will  show  you  that  the  Reichs- 
bank, within  the  30  years  of  its  existence,  has  121  times  been 
obliged  to  issue  more  notes  uncovered  by  metal  than  its  ^'Kon- 
tingent. ' '  You  will  also  see  that  the  "Kontingenf '  has  increased 
from  272  millions  in  1876  to  473  millions  now,  partly  by  the  dis 
appearance  of  smaller  banks  whose  "Kontingent"  has  accrued  to 

37 


the  Reichsbank,  partly  by  increase  which  it  was  found  useful  to 
make  by  law  owing  to  the  greater  volume  of  business.  You  will 
also  note  from  this  table,  that  the  excess  issue  very  generally 
occurs  on  the  last  day  of  September  and  on  the  last  day  of  the 
year,  because  of  the  special  requirements  of  business  connected 
with  the  harvest  and  with  the  end  of  the  year,  when  nearly  all 
joint  stock  companies  close  their 3:balance  sheets,  when  interest 
payment  on  mortgages  are  generally^due,  etc.  When  the  circula- 
tion of  the  banks  exceeds  the  arbitrary  *'Kontingent,"  and 
according  to  the  importance  of  the  excess  issue  of  bank  notes, 
the  money  market  contracts  automatically.  It  is  very  rare  that 
the  Reichsbank  has  been  obliged  to  pay  the  tax  for  any  length 
of  time.  A  week  or  a  little  more  is  usually  sufficient  to  re-estab- 
lish the  ordinary  circulation.  It  must  not  be  presumed  that 
whenever  the  Bank  has  to  pay  the  tax  it  would  raise  its  rate  of 
discount  to  the  full  extent  of  the  tax  incurred.  Indeed  the 
Reichsbank' s  rate  of  discount  within  30  years  has  been  raised  to 
7  per  cent,  only  once — from  December  19,  1899,  to  January  nth 
next  following — and  it  has  never  gone  above  that  figure.  Any- 
how the  system  so  far  has  proved  a  perfect  success.  The  Reichs- 
bank of  course  holds  very  much  more  coin  and  gold  than  the 
one-third  of  its  circulation  prescribed  by  law;  in  fact  on  the 
average  the  Bank  holds  double  that  amount  or  more;  thus,  when- 
ever a  large  demand  for  currency  arises,  the  Bank  can  easily 
supply  all  the  notes  that  are  needed;  but  whilst  the  bank  law 
allows  an  elastic  expansion  of  note  issue,  it  has  proved  to  bring 
about  also  the  necessary  contraction,  ^nd  has  been  a  sufficient 
check  hitherto  on  excess  of  speculation.  You  will  note  from  the 
table,  that  during  the  last  few  years  the  total  excess  of  bank 
note  issue  has  been  increasing  to  an  extent  that  may  be  taken  to 
mean  a  warning  to  speculation.  It  may  be  assumed,  however, 
that  under  the  prudent  and  moderate  discount  policy  followed  by 
the  Reichsbank  our  currency  will  be  kept  in  good  order  in  future 
as  for  the  last  thirty  years. 

In  order  to  furnish  you  the  occasion,  if  desirable,  to  study 
in  detail  our  currency  laws  and  their  working,  I  am  sending  you 
a  collection  of  the  German  laws  on  Banking  and  Currency,  also 
a  volume  "The  Reichsbank"  published  upon  the  25th  anniver- 
sary of  that  institution's  existence;  further  the  Reichsbank' s  last 


annual  report;  finally  a  booklet  by  an  employee  of  the  Reichs- 
bank,  giving  in  abbreviated  form  a  history  of  the  German  cur- 
rency since  the  enactment  of  the  present  laws. 

Should  you  desire  any  further  information  the  Deutsche  Bank 
will  be  pleased  to  furnish  it,  thus  contributing  as  far  as  this  may 
be  done  from  our  side,  to  bring  about  what  has  long  been  felt  in 
all  the  financial  markets  of  the  world,  to  be  a  much  needed 
reform  of  your  currency  system. 

I  remain,  dear  sir, 

Yours  very  respectfully, 

ARTHUR  QWINNER. 


From  the  nanaging  Director  of  the  Dlsconto-Qeselischaft,  Berlin. 

Berlin  W.  64,  August  2,  1906. 
Unter  den  Linden  35. 

Mr.  Chas.  a.  Conant, 

c/o  Messrs.  John  Munroe  &  Co., 
No.  7  Rue  Scribe,  Paris. 

Mr.  John  Claflin,  Chairman  of  the  Special  Currency  Com- 
mittee, requested  me  in  his  letter  of  June  9th,  which  reached  me 
during  the  latter  part  of  last  month,  to  give  him  an  expression 
of  my  views  in  regard  to  our  bank  note  system  and  its  workings. 
Although  I  cannot  on  account  of  the  mass  of  material  give  an 
exhaustive  discussion  of  the  subject,  I  will,  nevertheless,  endea- 
vor in  outline  at  least  to  comply  with  Mr.  Claflin's  request. 

Mr.  Claflin's  letter  calls  for  answers  to  the  following 
questions: 

I  St.  Does  the  circulation  of  notes  in  Germany  vary  from 
one  season  to  another  ? 

2nd.  Does  the  issue  of  uncovered  notes  have  any  effect 
upon  interest  rates,  and  has  such  issue  ever  prevented  a  crisis  ? 

89 


3rd.  What  advantages  does  the  German  system  of  bank 
note  issue  offer  ? 

It  must  first  be  stated  that  an  issue  of  uncovered  notes  in 
Germany  does  not  occur.  According  to  the  laws  governing  the 
Reichsbank  one-third  of  the  entire  issue  must  be  covered  by  cash  ; 
that  is,  by  lawful  German  money,  notes  of  the  Imperial  Govern- 
ment, gold  in  bars  and  foreign  coin;  the  remaining  portion  of  the 
note  issue  must  be  covered  by  bills  which  have  been  discounted. 
As  a  matter  of  fact,  the  note  issue  is  covered  by  actual  cash  in 
much  greater  measure' than  is  required  by  law.  On  many  occasions 
a  surplus  has  been  held  by  the  bank.  The  most  unfavorable  con- 
dition existed  on  September  30,  1905,  but  even  then  the  available 
funds,  consisting  of  coins  and  Government  notes,  constituted 
45*3^  of  the  actual  amount  of  notes  in  circulation. 

In  ordinary  parlance  mention  is  often  made  of  the  uncovered 
portion  of  the  circulation,  but  it  is  generally  understood  that  that 
portion  is  meant  which  is  covered  by  bills  of  exchange  and  not 
by  cash.  The  issue  of  notes  is  not  limited  by  law  but  is  governed 
by  the  requirements  of  the  money  market.  An  indirect  limita- 
tion, however,  does  exist  in  the  system  of  the  so-called  emer- 
gency issue.  As  soon  as  the  Reichsbank  has  exceeded  in  its 
note  issue  a  certain  amount  (at  the  present  moment  472,829,000 
M.),  this  surplus  issue  is  subject  to  a  penalty  on  the  basis  of  an 
interest  rate  of  5^  per  annum,  which  has  to  be  paid  to  the  Gov- 
ernment. In  this  way  the  bank  is  compelled  to  exercise  caution 
and  to  limit  its  note  issue  as  much  as  possible  during  times  of 
particular  stress. 

Question  i.  Both  the  total  note  circulation  and  the 
uncovered  portion  of  it  are  lowest  during  the  first  months  of  the 
year,  in  which  the  requirements  of  business  are  comparatively 
small.  They  are  both  at  their  highest  during  the  last  quarter  of 
the  year,  which  period  is  usually  characterized  by  a  strong  de- 
mand for  money.  Both  classes  of  circulation  show  quite  sudden 
increase  at  the  end  of  each  month  and  especially  at  the  end  of 
the  quarter  year,  when  the  settlements  call  for  large  payments. 
For  instance,  the  movement  of  the  total  circulation  during  the 
year  1905  was  between  1,163,854,000  M.  on  February  23rd,  and 
1,682,646,000  M.    on  September  30th.     The  difference  between 

40 


these  two  points,  as  you  will  see,  was  518,792,000  M.  Almost 
regularly  at  the  turn  of  the  quarter  the  Reichsbank  finds  it 
necessary  to  issue  notes  that  are  subject  to  the  tax.  This  period 
of  over  issue,  however,  is  of  short  duration,  for  the  return  flow 
of  money  very  soon  so  increases  the  cash  reserve  that  the  tax 
ceases. 

Question  2.  Regarding  the  reserve  for  the  note  issue  I  must 
refer  to  what  has  already  been  said.  The  facility  granted  the 
Reichsbank  to  issue  notes  against  bills  of  exchange  has  placed 
the  institution  in  such  a  position  that  it  is  always  able  to 
satisfy  any  demand  for  a  circulating  medium  and  to  prevent  an 
undue  enhancement  of  interest  rates  such  as  sometimes  occurs  in 
America  owing  to  the  lack  of  currency.  During  the  existence 
of  the  Reichsbank  since  1875  the  official  discount  rate  has  ranged 
between  3^  and  7^.  The  ofl&cial  bank  discount  rates,  taken  in 
five  year  periods,  have  averaged  as  follows  : 

1876/80  ....  4.172^ 

1881/85    ....  4-225^ 

1886/90  ....  3.641^ 

1890/95    ....  3.461^ 

1896/1900    .    .    .  4.420^ 

1901/1905  ....  3.859^ 

The  tax  above  referred  to]has  had  the  effect  of  preventing 
excessive  expansion  of  note  issues,  for  the  tax  is  higher  than  the 
average  rate  of  discount  and  consequently  as  a  rule  entails  a  loss 
to  the  bank,  so  compelling  a  limitation  of  the  issue. 

Question  3.  In  addition  to  the  Reichsbank  there  are  in 
Germany  at  the  present  time  four  private  banks  having  the  priv- 
ilege of  note  issue.  They  are  the  Bayerische  Notenbank  in 
Munchen,  the  Sachsische  Bank  in  Dresden,  the  Wurttember- 
gische  Notenbank  zu  Stuttgart  and  the  Badische  Bank  zu  Mann- 
heim. The  total  of  the  untaxed  issue  permitted  to  these 
banks  amounts  to  68,771,000  M.,  while  the  limit  for  the  Reichs- 
bank has  gradually  been  increased  to  472,829,000  M. 

A  feature  of  considerable  importance  as  far  as  the  position 
of  the  Reichsbank  is  concerned,  is  the  fact  that  the  private  banks 
liave  gradually  ceased  to  exert  any  important  influence  upon  the 

41 


domestic  money  market  or  upon  international  affairs  affecting  the 
German  monetary  system,  so  that  the  Reichsbank  has  taken  the 
position  de  facto  of  a  central  bank  of  issue  with  power  to  regu- 
late the  monetary  circulation  of  Germany.  The  advantages 
which  have  in  consequence  accrued  to  German  commercial 
interests  can  be  stated  in  brief  as  follows:  The  Reichsbank 
satisfies  any  increase  in  the  demand  for  money  out  of  its  own  re- 
sources by  enlarging  its  issue  of  notes  even  to  the  extent  of 
incurring  the  penalty  prescribed  by  law  in  the  event  of  an  over 
issue  ;  while  on  the  other  hand  by  the  control  of  its  rate  of  dis- 
count it  prevents  undue  expansion  of  its  circulation.  Through 
the  regulation  of  its  discount  rate  it  exerts  a  controlling  influence 
upon  domestic  business  affairs  and  upon  the  international  move- 
ments of  gold.  The  Reichsbank  guards  the  German  monetary 
system  against  outside  interference,  and  encourages  or  hinders 
by  means  of  its  discount  policy  the  inflow  or  outflow  of  gold. 
The  bank  maintains  under  all  circumstances  an  adequate  stock 
of  gold,  from  which  at  all  times  foreign  demands  can  be  met 
without  in  any  way  affecting  the  integrity  of  the  monetary 
system. 

The  German  bank  note  system  is  distinguished  beyond  all 
things  bj'-  the  fact  that  it  meets  equally  all  requirements  for 
elasticity  and  for  security. 

I  hope  that  the  foregoing  will  be  of  advantage  to  your 
discussions,  and  may  also  have  some  effect  upon  the  conclusions 
which  you  may  reach  with  regard  to  the  improvment  of  your 
currency  system  in  order  that  the  increasing  requirements  of 
trade  and  finance  in  the  United  States  may  be  met  to  better  ad- 
vantage than  heretofore.     I  am, 

Yours  very  respectfully, 

ARTHUR  SALOnONSOHN. 


43 


From  the  Governor  of  the  AustrcHungarian  Bank. 

ViKNNA,  July  22,    1906. 

Gentlemen: 

I  beg  to  acknowledge  the  receipt  of  your  favor  of  June 
igth,  and  have  now  to  inform  you  that  on  the  nth  of  this 
month  I  had  the  pleasure  of  meeting  your  delegate,  Mr.  Chas. 
A.  Conant,  and  of  discussing  with  him  the  various  points  men- 
tioned in  your  letter,  in  which  you  express  a  wish  to  have  my 
opinion  particularly  in  regard  to  the  operation  of  the  German 
so-called  indirect  note  issue.  I  will  gladly  comply  with  your 
request,  and  in  this  respect  would  refer  you  particularly  to  the 
exhaustive  exposition  in  chapter  9  of  the  work  handed  your 
delegate  issued  by  Mr.  I^eonhardt,  General  Secretary,  called, 
''The  Administration  of  the  Austrian-Hungarian  Bank  from 
1878  to  1885,"  and  would  add  that  the  proposition  made  by  the 
bank  in  1887  regarding  a  change  in  its  by-laws,  covering  a 
reform  in  its  note  issue  in  the  interest  of  the  general  welfare,  has 
stood  the  test  of  time. 

As  you  will  see  by  the  following  data,  during  a  period  of  18 
years, — 1888- 1905 — or  864  working  weeks,  the  excessive  circu- 
lation over  and  above  that  permitted  by  law,  free  of  duty,  oc- 
curred 55  times  iand  the  amounts  vary  from  45,654  kronen  to 
89,800,000  kronen  and  the  amount  of  duties  paid  to  the  Gov- 
ernment ranged  from  47,560  kronen  to  93,591  per  week,  or  em- 
braced a  total  payment  to  the  Government  of  1,294,880  kronen. 
I  would  further  point  out  two  notable  periods;  that  is,  of  these  55 
periods  where  the  note  issue  was  exceeded,  23  occurred  in  the 
month  of  October,  which  in  this  country  is  the  harvest  month 
and  calls  forth  additional  activity  both  in  trade  and  com- 
merce, and  further  that  the  system  of  note  taxation  exerted  no 
decided  influence  upon  the  discount  policy  of  the  bank  inasmuch 
as  the  Council  of  Administration,  after  careful  consideration  of  all 
circumstances,  had  occasion  to  raise  its  discount  rate  repeatedly 
during  times  when  the  limitation  of  its  note  issue  had  not  been 
reached;  and  also  on  several  occasions  when  its  limitations  were 
reached,  it  maintained  a  discount  rate  lower  than  the  legal  5^ 

48 


rate.      Thus  the  cost  of  the  tax  was  not    borne  by  its  clients 
but  by  the  bank  itself. 

I  am  always  at  your  disposal,  and  remain, 

Yours  respectfully, 

DR.  LEON  RITTER  von  BILINSKI. 


From  the  former  Governor  of  the  Netherlands  Bank. 

Bad-Nauhkim,  July  25,  1906. 

Mr.  John  Claflin,  Chairman  Special  Currency  Committee, 

Chamber  of  Commerce  of  the  State  of  New  York. 

My  Dear  Sir : 

Mr.  Conant  sent  me  your  letter  of  June  19,  in  which  you 
ask  me  to  give  information  regarding  the  banking  system  of  my 
country  (Holland).  Owing  to  my  absence  from  home  I  am 
unable  to  give  you  any  statistics,  but  I  can  easily  supply  you 
with  some  details  showing  you  in  what  manner  we  have  been  able 
to  secure  that  elasticity  which,  in  my  opinion,  is  one  of  the 
principal  requisites  of  a  good  currency. 

In  the  years  1863  and  1864  questions  of  banking  policy  were 
much  discussed  in  Holland.  The  Bank  charter  was  about  to 
expire  and  there  was  a  strong  party  advocating  ''free  banking." 
I  never  belonged  to  that  party.  My  opinion  then  was,  as  it  is 
now,  that  competition  generally  is  an  excellent  thing,  but  that 
there  are  exceptions  to  every  general  maxim,  and  that  at  the 
present  time  it  may  be  useful  to  possess  at  least  one  credit  insti- 
tution which  by  its  position  is  not  compelled  to  extend  its 
operations  to  the  utmost  limit.  This  consideration  for  me  was, 
at  that  time,  the  main  reason  why  I  strongly  combatted  the 
proposal  to  terminate  the  monopoly  of  the  Netherlands  Bank  as 
bank  of  issue.  I  am  happy  to  say  that  no  such  proposal  has 
been   adopted,    and   that   when  in  1889  and  in  1904  the  Bank 

44 


charter  had  again  to  be  renewed,  Jiobody,  either  in  the  press  or 
in  Parliament,  advocated  a  change  of  system. 

The  fact  is,  that  during  all  the  commercial  crises  that 
occurred  since  1864,  the  Bank  had  proved  to  be  the  main  support 
of  credit.  Not  only  did  never  the  slightest  doubt  arise  as  to  the 
convertibility  of  the  note,  but  there  never  arose,  also,  any  doubt 
regarding  the  Bank's  power  -to  make  any  advances  that  might  be 
demanded.  That  is  the  reason  why  nobody  nowadays  dreams  of 
parting  with  a  system  which  gives  to  the  country  a  feeling  of 
strength  and  security,  and  at  the  same  time,  by  its  branches  and 
agencies,  places  the  means  of  the  Bank  at  the  disposal  of  all,  even 
in  the  remotest  places. 

The  rules  to  which  the  Bank  is  submitted  are  very  simple. 
It  is  not  allowed  to  do  any  other  business  but  discounting  bills 
payable  in  Holland,  making  advances  on  securities  and  merchan- 
dise, and  purchasing  bills  payable  abroad.  The  amount  of 
money,  however,  invested  in  this  last  branch  may  not  e^sceed, 
except  for  a  period  of  two  weeks,  the  amount  of  its  ' 'surplus  me- 
tallic stock."  The  surplus  metallic  stock  is  the  amount  of  gold 
and  silver  which  the  Bank  holds  in  excess  of  the  amount  it  is 
required  to  hold.  It  is  required  to  hold  40  per  cent,  of  its  cash 
liabilities  (notes  and  deposits).  Hence,  supposing  the  cash  lia- 
bilities to  be  280  millions  of  florins  (2^  florins  =  $1)  and  the 
stock  of  gold  and  silver  to  150  millions,  the  surplus  would  be 
38  millions. 

Every  week  the  main  figures  of  the  balance  sheet  are  pub- 
lished, including  that  of  the  surplus,  to  which  considerable  atten- 
tion is  paid.  It  is  expected — and  this  expectation  has  always 
been  realized — that  the  Bank  will  always  keep,  in  ordinary  times, 
a  large  surplus,  so  as  to  be  able  to  meet  any  extraordinary  de- 
mand. We  look  upon  this  as  one  of  the  unwritten  conditions — 
unwritten  because  it  would  be  impossible  to  formulate  them  cor- 
rectly— under  which  the  charter  has  been  granted.  There  are 
periods — and  they  last  very  long  sometimes — during  which  the 
surplus  rises  to  an  enormous  sum,  but  the  Bank  does  not  care. 
It  knows  quite  well  that  better  times  for  it  will  return,  and  that 
the  community  is  all  the  safer  for  not  having  the  demand  for 
money  stimulated  immediately  by  very  low  rates  of  interest. 

45 


There  is  a  circumstance,  however,  which  strongly  facilitates 
to  the  Bank  the  adherence  to  this  line  of  conduct.  The  Bank's 
paid  up  capital  is  not  large  at  all,  only  twenty  millions  of  florins, 
about  one-fourteenth  part  of  its  cash  liabilities.  It  used  to  be 
fifteen  millions,  but  in  1889  it  was  brought  up  to  the  present 
amount.  At  that  time  I  was  Governor  of  the  Bank,  and  it  was 
my  duty  to  consider  whether  the  increase  from  fifteen  to  twenty 
were  sufiicient.  My  conclusion  was  that  not  only  was  it  sufficient, 
but  that  it  was  not  even  needed.  The  reason  why  a  bank  wants 
capital  of  its  own  is  simply  this,  that  it  desires  to  have  some- 
thing— even  a  great  deal — to  fall  back  upon  in  case  of  losses. 
But  fifteen  millions  is  a  great  deal ;  the  losses,  even  in  the  worst 
years,  have  never  been  so  great  as  to  exceed  a  small  part  of  the 
bank's  profits  ;  they  never  affected  its  capital ;  and  it  seemed  to 
me,  when  thinking  out  the  subject,  that  there  is  really  a  certain 
danger  in  carrying  up  the  bank's  capital  to  a  too  high  amount, 
because,  it  is  much  easier  to  earn  a  good  dividend  on  a  small 
capital  than  on  a  large  one.  I  just  said  that  in  quiet  times  the 
bank  suffers  its  surplus-metallic  stock  to  increase  (which  involves 
that  it  suffers  its  discounts  and  advances  to  diminish)  very  large- 
ly. It  w^ould  undoubtedly  be  less  easy  for  the  bank  to  do  so  if 
its  capital  were  considerably  greater  than  it  is. 

I  hope  that  this  information  may  be  deemed  sufficient. 
You  will  see  that  in  my  country  there  is  no  special  mechanism, 
such  as  taxing  the  outstanding  uncovered  notes  in  excess  of  a 
certain  amount  for  securing  "elasticity."  But  the  w^hole  system 
is  so  arranged  as  to  produce  this  effect.  The  bank,  though  a  pri- 
vate institution,  is  governed  on  principles  of  a  non-private  char- 
acter. The  Governor  and  the  Secretary,  being  appointed  by  the 
Queen,  look  upon  their  duties  as  mostly  public  ones.  They  hold 
that  no  bank  of  issue  is  properly  managed  unless  its  conditions 
be  such  as  to  allow  of  an  increased  issue  of  notes,  whenever  neces- 
sary, above  the  usual  amount,  and  they  conduct  the  bank  oper- 
ations in  agreement  with  these  principles. 

I  should  be  slow  to  believe  that  any  mechanism  would  answer 
the  purpose  as  well.  Mechanisms  have  always  some  defect 
hampering  their  operation,  or  they  produce  consequences  not 
contemplated  and  harmful. 

46 


Now,  whether  in  all  this  there  is  anything  of  practical  inter- 
est for  those  who  wish  to  improve  the  banking  system  of  the 
United  States,  I  do  not  know.  Of  course,  the  same  bank  system 
would  never  do  for  a  very  large  country,  the  needs,  both  tempo- 
rary and  permanent,  of  its  various  parts  differing  so  much. 
Perhaps  you  might  think  of  one  bank  for  each  State ;  or  of 
forming  between  the  banks  of  each  State  an  arrangement  in  virtue 
of  which  their  rates  of  interest  for  discounts  and  advances  were 
fixed  by  a  Central  Board,  to  whose  decisions  each  and  all  of  them 
were  bound  to  submit.  All  this  requires  a  local  knowledge  which 
I  do  not  possess.  I  could  only  give  you  a  brief  sketch  of  our 
own  system  and  an  account  of  the  results  it  has  produced. 

With  the  assurance  of  my  highest  regard, 

I  am,  dear  Sir,  yours  respectfully, 

N.  Q.  PIERSON. 


47 


REICHS  BANK 

Reserve  of  Bank  Notes  under,  and  Excess  of 

(Amounts  in 


YBAR 


1876 
1877 
1878 
1879 
1880 
1881 
1883 
1883 
1884 
1885 
1886 
1887 
1888 
1889 
1890 
1891 
1892 
1893 
1894 
1895 
1896 
1897 
1898 
1899 
1900 
1901 
1902 
1903 
1904 
1905 


Arbitrary 

allowance 

('Kontingent') 

of  Notes  not 

covered  by 

Metal,  free  of 

tax,  at  the  end 

of  every  year. 


272.720 

273.875 
273.875 
273.875 
273.875 
273.875 
273.875 
273.875 
273.875 
273.875 
274.834 
276.085 
276.085 
286.585 
288.025 
292.117 
292.117 
292.117 
293.400 
293.400 
293.400 
293.400 
293.400 
293.400 
293.400 
460.000 
470.000 
470.000 
470.000 
472.829 


Amount  of  Bank  Notes  which  might  have  been 
issued,  free  of  tax  (Reserve  of  Notes) 


Average 


152.704 
155.088 
185.222 
195.358 
167.639 
148.443 
121.817 
176.123 
168.786 
168.640 
196.583 
220.649 
277.110 
194.200 
135.431 
246.010 
283.444 
183.302 
262.761 
243.237 
135.209 
113.026 
54.691 
12.271 
8.689 
214.600 
254.400 
163.800 
153.500 
153.700 


Highest 


Date 


June  7tli 
March  23rd 
June  7tli 
March  23rd 
June  7th 
March  7th 
March  23rd 
March  15th 
March  15  th 
June  7th 
Feb.  23rd 
June  15  th 
June  7th 
March  15  th 
June  7  th 
Aug.  23rd 
Feb.  23rd 
Feb.  23rd 
Nov.  23rd 
Feb.  23rd 
Feb.  23rd 
Feb.  23rd 
Feb.  23rd 
Feb.  23rd 
Feb.  23rd 
June  15th 
Feb.  23rd 
Feb.  23rd 
Feb.  23rd 
Feb.  23rd 


Amount 


242.981 
222.422 
241.643 
299.225 
231.531 
260.499 
221.532 
269.793 
268.549 
252.251 
330.763 
332.665 
446.715 
367.662 
276.468 
359.147 
431.678 
350.404 
366.795 
471.164 
317.083 
317.299 
321.503 
222.873 
181.810 
416.400 
501.400 
368.000 
358.800 
509.000 


I^owest 


Date 


Jan.  7th 
Sept.  30th 
Jan.  7th 
Dec.  31st 
Dec.  31st 


Dec.  31st 


Jan.  7th 
Dec.  31st 


Jan.  7th 
Dec.  31st 

Jan.  7th 


30.519 
56.997 
74.173 
71.648 
48.975 


36.180 


11.526 
66.143 


32.328 
16.764 

60.286 


Circulation  over  the  Arbitrary  "  Kontingent. 
Thousand  Marks) 


Excega  of  Issue  over  and  above  the 
Arbitrary  "  Kontingent." 

Number 
of  over- 
issues 

Total 
Amount 
of  over- 
issues 

Highest  amount  of 
over-issues 

Tax 

Date 

Amount 

paid 

1 

2 

1 

1 
1 

3 
6 

1 

3 

6 

9 

16 

20 

20 

5 

3 

7 

7 

9 

26.092 
31.409 

32.679 

2.615 

34.161 

226.528 
325.082 

38.518 

215.080 

446.209 

737.199 

1850.325 

2733.402 

2417.139 

338.577 

459.157 

773.057 

1073.638 

1584.963 

Dec.  31st 
Sept.  30th 

Dec.  31st 
Jan.  7th 
Dec.  31st 

Dec.  31st 
Oct.  7th 

Sept.  30th 

Dec.  31st 
Dec.  81st 
Sept.  30th 
Dec.  31st 
Sept.  30th 
Dec.  31st 
Sept.  30th 
Dec.  31st 
Dec.  31st 
Sept.  30th 
Sept.  30th 

26.092 
19.224 

32.679 

2.615 

34.161 

109.478 
104.205 

38.518 

148.283 
134.149 
205.830 
282.955 
371.233 
355.917 
108.601 
231.639 
274.949 
305.038 
450.283 

27 
33 

34 

3 

36 

236 

339 

40 

224 

465 

768 

1927 

2847 

2518 

353 

478 

805 

1118 

1651 

121 

or$; 

13.902 
3.310.000 

NOTE  CIRCULATION  AND  STOCK  OF  METALLIC  MONEY  IN  THE 


(IN    MARKS) 


Amount  of 

stock  of 

Cash. 
(Metal,  Notes  of 

Amount  of 

Date  of  over-Issue 

Authorized  Issue 

Metal 

other  Banks  and 
Treasury  Notes.) 

Circulation 

over-issue. 

1901    7,  January 

450,000,000 

761,002,000 

793,201,000 

1,309,198,000 

65,995,930 

80,  March 

460,000,000 

811,668,000 

845,076,000 

1,321,420,000 

16,347,335 

30,  September 

460,000,000 

830,442,000 

861,819,000 

1,430,427,000 

108,601,148 

7,  October 

460,000,000 

831,277,000 

865,981,000 

1,365,153,000 

39,176,396 

31,  December 

460,000,000 

868,501,000 

897,320,000 

1,465,787,000 

108,456,421 

1902  30,  September 

470,000,000 

839,804,000 

874,354,000 

1,495,370,000 

151,015,199 

7,  October 

470,000,000 

836,834,000 

869,559,000 

1,416,059,000 

76,503,876 

31,  December 

470,000,000 

786,128,000 

814,830,000 

1,516,469,000 

231,638,836 

1903    7,  January 

470,000,000 

823,318,000 

854,481,000 

1,397,109,000 

73  638,154 

31,  March 

470,000,000 

818,482,000 

854,025,000 

1,449,540,000 

135,514,615 

7,  April 

470,000,000 

817,385,000 

853,010,000 

1,350,081,000 

37,068,533 

30,  June 

470,000,000 

884,259,000 

919,973,000 

1,434,565,000 

44,587,518 

80,  September 

470,000,000 

858,015,000 

891,593,000 

1,515,581,000 

153,987,512 

7,  October 

470,000,000 

851,100,000 

885,019,000 

1,429,343,000 

74,331,008 

31,  December 

470,000,000 

793,459,000 

820,537,000 

1,565,490,000 

374,949,399 

1904    7,  January 

470,000,000 

834,443,000 

868,434,000 

1,438,295,000 

99,861,153 

31,  March 

470,000,000 

828,079,000 

860,804,000 

1,496,935,000 

166,136,903 

7,  April 

470,000,000 

852,917,000 

899,609  000 

1,385,839,000 

16,332,874 

80,  June 

470,000,000 

870,048,000 

902,449,000 

1,477,852,000 

105,400,518 

80,  September 

470,000,000 

793,143,000 

824,023,000 

1,599,067,000 

305,038,527 

7,  October 

470,000,000 

789,444,000 

833,181,000 

1,482,350,000 

179,169,568 

15,        " 

470,000,000 

839,669,000 

897,616,000 

1,395,915,000 

28,298,848 

31,  December 

470,000,000 

927,060,000 

956,261,000 

1,599,784,000 

173,519,879 

1905  81,  March 

470,000,000 

1,015,884,000 

1,052,488,000 

1,543,505,000 

21,016,649 

30,  June 

470,000,000 

950,791,000 

985,875.000 

1,554,802,000 

98,927,495 

30,  September 

470,000,000 

732,215,000 

762,361,000 

1,682,646,000 

450,282,987 

7,  October 

470,000,000 

755,175,000 

797,785,000 

1,536,363,000 

268,574,916 

14,        " 

470,000,000 

787,357,000 

837,735,000 

1,450,251,000 

142,517,347 

33, 

470,000,000 

834,409,000 

892,607,000 

1,388,204,000 

25,593,861 

81,        " 

470,000,000 

794,174,000 

825,527,000 

1,442,072,000 

146,547,804 

7,  November 

470,000,000 

798,992,000 

839,658,000 

1,385,525,000 

75,864,662 

80,  December 

473,829,000 

803,525,000 

831,043,000 

1,656,679,000 

355,637,324 

1906    6,  January 

472,829,000 

854,032,000 

892,580,000 

1,515,306,000 

149,897,000 

31,  March 

472,829,000 

888,980,000 

922,921,000 

1,629,098,000 

233,348,000 

7,  April 

472,829,000 

915,791,000 

958,428,000 

1,477,287,000 

46,030,000 

80,  June 

472,829,000 

844,429,000 

892,971,000 

1,647,872,000 

282,072,000 

7,  July 

472,829,000 

879,012,000 

939,041,000 

1,501,113,000 

89,242,000 

REiCHSBANK  ON  DAYS  WHEN  AN  OVER-ISSUE  OGOURREO. 


Amount  of  cover  as 

STOCK  OF  MiRTAI, 

required  by  Sec.  9  of 

the  Banking  Law  of 

March  14th,  1875 

Circulation  and 
other  maturing 

To  secure 

To  secure 

To  secure 

To  secure 

Rate  of 
Discount 

Date  of  over-issue 

obligations 

circula- 

other ma- 
turing 
obligations 

circulation 

other  ma- 
turing ob- 
ligations 

tion.  Per- 

Per- 

centage. 

Percentage 

centage 

Per- 
centage. 

1,814,128,000 

58.1 

41.9 

60.6 

43.7 

5 

7, 

January,      1901 

1,826,530,000 

61.4 

44.4 

63.9 

46.3 

4i 

30, 

March, 

1,953,568,000 

58.1 

42.5 

60.3 

44.1 

4 

30, 

September, 

1,865,886,000 

60.9 

44.6 

63.4 

46.4 

4 

7, 

October, 

2,028,975,000 

59.3 

42.8 

61.2 

44.2 

4 

31, 

December 

3,034,572,000 

56.2 

41.3 

58.5 

43.0 

3 

30, 

September,  1903 

1,923,737,000 

59.1 

43.5 

61.4 

45.3 

4 

7, 

October, 

2,060,433,000 

51.8 

38.2 

53.7 

39.5 

4 

31, 

December, 

1,913,106,000 

58.9 

43.0 

61.2 

44.7 

4 

7, 

January,      1908 

1,984,741,000 

56.5 

41.2 

58.9 

43.0 

n 

31, 

March, 

1,844,625,000 

60.5 

44.3 

68.2 

46.3 

3i 

T, 

April, 

2,000,675,000 

61.6 

44.2 

64.1 

46.0 

4 

30, 

June, 

2,066,179,000 

56.6 

41.5 

58.8 

43.2 

4 

30, 

September 

1,905,894,000 

59.5 

44.7 

61.9 

46.4 

4 

7, 

October, 

2,140,408,000 

50.7 

37.1 

52.4 

38.3 

4 

31, 

December, 

1,949,423,000 

58.0 

42.8 

60.4 

44.6 

4 

7, 

January,      1904 

2,036,574,000 

55.3 

40.7 

57.5 

42.3 

4 

31, 

March, 

1,917,082,000 

61.5 

44.5 

64.9 

46.9 

4 

7, 

April, 

2.017,605,000 

58.9 

43.1 

61.1 

44.7 

4 

30, 

June, 

2,131,775,000 

49.6 

87.2 

51.5 

38.6 

4 

30, 

September, 

1,978,479,000 

53.3 

39.9 

56.2 

42.1 

4 

7, 

October, 

1,895,677,000 

60.2 

44.3 

64.3 

47.3 

5 

15, 

(( 

2,180,081,000 

57.9 

42.5 

59.8 

43.9 

5 

31, 

December 

2,134,506,000 

65.8 

47.6 

68.1 

49.7 

8 

31, 

March,         1905 

2,133,903,000 

61.2 

44.6 

63.4 

46.2 

8 

3o; 

June, 

2,239,021,000 

43.5 

32.7 

45.8 

34.0 

4 

30, 

September, 

2,060,636,000 

49.2 

36.7 

55.5 

38.7 

5 

7, 

October, 

1,967,907,000 

54.3 

40.0 

57.8 

43.6 

5 

14, 

(( 

1,918,945,000 

60.1 

43.5 

64.3 

46.5 

5 

23, 

" 

1,929,565,000 

55.1 

41.2 

57.2 

42.8 

5 

31, 

C( 

1,859,920,000 

57.7 

42.9 

60.6 

45.1 

5i 

7, 

November, 

2,287,486,000 

48.5 

35.1 

50.2 

36.3 

6 

30, 

December, 

2,039,802,000 

56.4 

41.9 

58.9 

43.7 

6 

6, 

January,      1906 

2,218,094,000 

54.6 

40.1 

56.6 

41.6 

5 

31, 

March, 

2,021,801,000 

62.0 

45.3 

64.9 

47.4 

5 

7; 

April, 

2,247,511,000 

51.2 

37.6 

54.2 

39.7 

4i 

30, 

June, 

3,062,812,000 

58.6 

42.6 

62.5 

45.5 

4i 

7, 

July, 

SPECIFICATION   OF    THE  AMOUNTS  OF  UNCOVERED  NOTE  ISSUE  AS  WELL   AS 
THE  AMOUNTS  OF  OVERSECURED  ISSUE  ON  BANK  STATEMENT  DAYS. 

The  highest  and  lowest  amount  of  each  year  is  shown  by  a  finedrawn  under  the  respective  amounte 

Shown  In  Multiples  of  Mk.   1000. 

The  amount  of  unsecured  notes  is  given  in  black  faced  type  and  the  maximum  amount 

is  underscored. 


DATE 

1901 

1902 

1903 

1904 

1905 

1906 

DATE 

1 

2 

3 

4 

5 

6 

7 

8 

January 

7 

515,997 

426,055 

542.628 

569,861 

438,915 

633,726 

7 

January 

" 

15 

356,015 

260,469 

356.983 

377,263 

285,185 

892,333 

15 

" 

(( 

23 

227,659 

132,862 

242,946 

246,913 

133,071 

260,365 

23 

(( 

<< 

31 

264,316 

161,344 

306,038 

297.135 

182,263 

335,488 

31 

(( 

February 

7 

230,146 

95,116 

231,217 

247.539 

126,262 

278,587 

7 

February 

" 

15 

154,579 

23,149 

175,297 

186,248 

85,001 

187,671 

15 

«< 

(( 

23 

28 

100,189 
129,274 

41.388 

102,006 

111,204 

38,971 

136,186 

23 

28 

(( 

(> 

31,050 

209,213 

209,620 

76,971 

244,063 

<( 

March 

7 

111,889 

19,734 

182,276 

186,095 

71,146 

225,362 

7 

March 

<  i 

15 

89,272 

113 

164,670 

140,167 

12,913 

171,918 

15 

(( 

" 

23 

108,303 

15,070 

165,744 

134,696 

8,238 

160,408 

23 

(( 

" 

31 

476,344 

359,062 

595,515 

636,131 

491,017 

706,177 

31 

ii 

April 

7 

418.426 

313  390 

497,071 

486,230 

373,933 

518,859 

7 

AprU 

" 

15 

253,469 

163,967 

368,048 

321,092 

254,798 

396,381 

15 

(( 

' 

23 

150,744 

80,449 

270,442 

230,346 

181,499 

260,474 

23 

(( 

<  < 

30 

225,693 

170,471 

347,538 

369,162 

260,395 

386,414 

30 

(( 

May 

7 

190,640 

140,610 

297,627 

308,743 

236,331 

340,731 

7 

May 

" 

15 

117,749 

81,492 

219,361 

249,039 

136,731 

243,804 

15 

ii 

*' 

23 

60,760 

6,595 

161,925 

164,139 

41,845 

148,270 

23 

ii 

*' 

31 

98,991 

68,702 

251,474 

207,974 

159,875 

266,802 

81 

a 

June 

7 

68,389 

29,737 

189,743 

183,480 

139,170 

236,932 

7 

June 

" 

15 
23 

48,574 

789 
2,064 

148,066 
140,663 

137,961 
148,653 

80,463 
113,454 

190,700 
221,216 

15 
23 

<* 

(< 

51,a6tt 

(< 

<i 

30 

7 

443,492 
880,402 

382,175 
319,758 

514,593 
415,491 

575,403 
468,581 

568,937 
448,190 

754,901 

30 

7 

<( 

July 

562,071 

July 

a 

15 

274,067 

190,927 

278,635 

327,590 

331,595 

436,757 

15 

ii 

t( 

23 

182,004 

107,501 

179,207 

231,259 

333,471 

23 

ii 

ii 

31 

235,741 

173,741 

253,660 

312,597 

833,354 

31 

ii 

August 

7 

204,450 

145,850 

234.471 

282,125 

303,333 

7 

August 

" 

15 

168,203 

110,628 

169,888 

233,171 

351,171 

15 

(( 

23 

121,379 

73,875 

123,838 

175,283 

199,031 

S3 

<( 

i( 

31 

229,126 

173,648 

226,075 

292,335 

340,888 

81 

(( 

September 

7 

215,859 

185,732 

223,906 

289,159 

844,538 

7 

Septembeir 

it 

15 

191,655 

181,743 

193,964 

278,891 

353,895 

15 

(( 

ii 

23 

193,606 

196,844 

198,000 

309,617 

377,689 

23 

(< 

(( 

30 

7 

568,608 

621,016 
546,500 

628,988 
544,324 

775.044 

930,385 

80 

7 

(( 

October 

499,172 

649,169 

738,578 

October 

'< 

15 

386,911 

415,539 

415,055 

498,299 

613,516 

15 

(( 

(( 

23 

285,823 

333,952 

339,751 

396,999 

495,597 

23 

(( 

ii 

31 

356,061 

433,846 

460.951 

447,107 

616,545 

81 

(< 

November 

7 

311,031 

889,976 

400,626 

385,643 

645,867 

7 

November 

(( 

15 

258,493 

335,138 

354,660 

293,404 

451,985 

15 

(( 

(( 

23 

196,367 

272,570 

264,830 

183,740 

363,867 

23 

(( 

(( 

30 

264,628 

335,193 

344,346 

260,520 

453,603 

30 

(( 

December 

7 

230,472 

325,117 

336,456 

239,899 

438,533 

7 

December 

ii 

15 

203,206 

304,150 

309,957 

209,800 

415,873 

15 

a 

a 

23 

255,150 

370,174 

890,961 

283,504 

469,608 

23 

it 

ti 

31 

568,467    . 

701,639 

744,953 

643,533 

835,636 

31 

a 

Av.  for  the  Year 

243,075 

211,443 

306,210 

816,486 

316,466 

Average  amount 

showing  degree 
of  elasticity  .  .   . 

... 

525,034 

743,027 

643,947 

663,840 

959,356 

Av.  rate  of  dis't     • 

... 

4,099^ 

3,121^ 

d,8d7% 

4,322^ 

3,817^ 

No.of  Bank  state- 

ment days  on 

which  an  over- 

issue is  shown  •  •  . 

... 

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